New Evidence on the Relations among Stock Returns, Inflation and Economic Activities

Abstract

Impulse Response Function (IRF) and Forecast Error Variance Decomposition (FEVD) are used in a four-variable VAR to analyse the inter-relationships among stock returns and three macroeconomic variables. The positive relation between China’s stock market returns and inflation suggests that inflation in China is more of a monetary phenomenon. The stronger causation from stock market to real economic activities than the other way around is against traditional wisdom but provides support to Titman’s (2013) catalytic model for equity market.