Research On Information Efficiency In China Stock Market

Market efficiency has been as a central question in the financial field, which runs through thewhole history of financial theory’s development. There are different answers to this question fromclassical finance theory and behavioral finance theory, the former proposes the destiny of marketwill be efficiency, because information should and must be reflected by stock price; while thelatter points out that non-efficiency is normal phenomenon, due to human’s non-rational behaviorsand realities in the real world. Based on a fully summary of existing research from classicalfinance theory and behavioral finance theory, and the divergences of the parties, this paper focuson the subject of market efficiency, reviews real world’s operation logic from a time dimensionperspective, especially the occurrence and reflection pattern of information, analyzes the forms ofinformation efficiency (reflection mechanism of information) in real market using theoretical logic,then gives empirical tests on our hypothesizes about information efficiency in real market, whichsupplies a dialectical and objective interpretation of the state, features and reasons of informationefficiency in real market, and a theoretical and empirical basis to reconcile divergences betweenclassical finance and behavioral finance.Basing on summary and analysis of the existing research, Chapter3gives discussion toinformation efficiency in real market. It is the theoretical basis of the whole paper, which supportsour empirical research, analyzing operation logic in real market and corresponding informationefficiency under real conditions, and giving two hypothesizes about the forms of information’sreflection mechanism—cycle of information reflection (hereafter CIR) in short term and cycle ofvalue and price discrepancy (hereafter CVPD and VPD) in long term. The mechanism ofinteraction between driving force and blocking force gives a full indication of operation logic inreal market, which follows the driving mode, keeping consistent between value and price throughprinciple of information reflection and principle of equilibrium among risk and return, alsogenerates non-rational factors and frictions, making value and price discrepancy. In thisframework, market efficiency would display as a process, but not a state, which means market’s state will just be a cross-section point from the process of market efficiency in any time. When themarket acts as a process, there are two forms of market phenomenon: in short term, market’sreflection to specific information will be display as an identified process, which shows a timeinterval between start point and end point of information reaction, forming an identified cycle ofinformation reflection; in long term, stock rice will eventually make fully reflection of allinformation, but this needs a long process; occurrence of new information will influence theconsistence between value and price in any time, which make the discrepancy between value andprice circulating, called cycle of value and price discrepancy.Chapter4goes along with Chapter3, and gives a empirical test on the existence of CIR inshort term. Following previous studies, which examine information’s influence to market usingevent study method, we use structure change test to confirm the start point and end point ofinformation reflection, then show the full process of information reflection in short term to verifythe existence of CIR. Tests based on event study show that, the market gives relative efficientreflection to six kind of information including annual earnings announcement, supposed by zeroCIR of samples; while, there are also non-zero CIR samples, although as only a micro individualphenomenon; pre-event CIR and post-event CIR show coexistence characteristics, and post-eventCIR has more stable features. Overall, Our results suggest that the real market has discovering andreflecting function which has been defined by theory, while the mechanism of informationreflection is different from EMH’s perfect logic; in short term, information efficiency be displayedas a reflection process to a specific information, which means reality and generality of CIR, whileCIR depends on environment and will be impacted by sample’s individual characteristics.Chapter5gives further empirical test on Chapter3for hypotheses of information efficiency.Based on papers’ summary, which about feasibility, reality and phenomenon of value and pricediscrepancy, this chapter investigates value and price discrepancy from a time-series perspective,in order to confirm CVPD’existence and characteristics in long term. This will supply more actualdata support for explaining operation logic in real market, then reconcile the conflict betweenclassical finance and behavioral finance. Firstly, we calculate true value of stock using residualincome model (hereafter RIM), matching with stock price, and get the variable of value and pricediscrepancy; secondly, we regress this variable on a time-trend two order equation to examine its characteristics, authenticating the existence of CVPD. This chapter’s results show that, there aremore VPD than negative VPD sample data, which means stock price overvalued is a generalphenomenon in the market; relative high deviation of VPD among sample data suggests that VPDhas some sample dependent characteristics; a time-trend two order equation fits the time series ofVPD well, which points out VPD’s circulating form in long term; for our sample interval(2000-2010), VPD has experienced a period of six years from downward to upward trend in Chinastock market, fully confirming the existence and persistence of CVPD.Chapter6also follows Chapter3, and takes further examination on the reasons ofinformation efficienct, analyzes which factor influences the forms of information efficiency inshort term and long term (CIR and VPD), and whether there is different impact pattern in differenttime dimension, explaining the motivation to the dynamic of information efficiency finally.Empirial examination in this chapter indicates, CIR in short term and VPD in long term couldexplained by real fundamental information factors, limitations and biases of human behaviorfactors, which gives support to our hypotheses about forms of information efficiency in realmarket. In addition, studies on the influential factors about CIR and VPD show that these factorsmay have different impact pattern in different time dimension (short term or long term): theirimpact pattern consistent to financial theory in the long term, while any factor would hitinformation efficiency in real market by a shock in the short term.