Stock returns under hyperinflation: Evidence from China 1945-48

- This paper presents new empirical evidence for the Fisher hypothesis in the Chinese hyperinflation context.
- This paper brings new data to the table in the form of weekly and monthly time series on stock return, inflation rate and interest rate.
- In contrast to the empirical literature on the 'stock return-inflation puzzle', this paper finds that the Fisher hypothesis is applicable to common stocks even with a short-horizon in the period of Chinese hyperinflation.

This paper presents new evidence for the Fisher hypothesis, which states a positive relationship between nominal stock returns and inflation. We introduce a new data set from the episode of hyperinflation that occurred in China after World War II. To establish the reliability of our estimates we consider different frequencies, and time horizons and econometric models. The results reveal that stocks were a complete hedge against expected inflation and a partial hedge against unexpected inflation. In contrast to the empirical literature on the 'stock return-inflation puzzle', we find that the Fisher hypothesis is applicable to common stocks even with a short-horizon in the Chinese hyperinflation context.