Study of the Weak-form Efficent Market Hypothesis - Evidence from the Chinese stock market

Abstract

This paper examines the Chinese stock market efficiency through validation of the weak-form efficient market hypothesis of the Shanghai and Shenzhen stock exchanges. Also, the paper attempts to determine the presence of daily calendar effects on the Chinese stock market. Stock market returns ranging from 1992 to 2015 are used for three price indices of the Shanghai and Shenzhen market, namely the A-share, B-share and Composite indices. The stock market efficiency is tested for each index by applying various statistical techniques such as tests for autocorrelation, runs, and variance ratio. The daily calendar effect is determined through an ordinary least squares regression model. We find that the generated results are consistent with previously conducted studies, which state that the Chinese stock markets are not weak-form efficient. According to the results from the autocorrelation test, runs test and variance ratio test, the random walk hypothesis is denied in all three instances in both Chinese markets. Even though B-share indices in both markets consistently exhibit a lesser degree of randomness compared to A-share and Composite indices, the latter two show signs of increasing efficiency between 1992 and 2012. Regarding the daily calendar effect, the results that all three indices in both markets exhibit at least one significant day of the week effect throughout the whole period.