Abstract: There is no consistent conclusion in empirical research about the Fisher effect reflecting the relationship between inflation rate and stock return. In this paper, the threshold regression model is employed to examine the Fisher effects in China's Stock Market. The results find that the stock returns and inflation rate shows a negative correlation, which shows that the Fisher effect does not hold in China's stock market. But there exists an obvious threshold effect: the negative correlation is not significant during the period of low inflation or deflation, but when the inflation rate is high, the negative correlation is significant, which show an obvious asymmetric feature. This result indicates that stock is not an ideal hedge against inflation in China. Additionally, further tests show that the price of gold spot is not significantly related with inflation and the negative relation between inflation and the index of gold stocks implies those gold stocks are also not a good hedge.

Keyword: Fisher effect; threshold regression model; stock returns; inflation