Empirical Analysis On The Efficiency Of Chinese Stock Market

1. Theory According to the Efficient Market Hypothesis, in weak-form efficient market, investors can't make abnormal profit (other than by chance) only by using past market information such as past prices to formulate buying and selling decisions. So if we can build up a model just according to the past market information and do make abnormal profit in a stock market, then the stock market is not weak-form efficient market.2. Assumptions 1) No any expense for transactions. 2) The risk-free rate equals to zero. 3) The capital can flow between in the A stock market and the B stock market without any obstacle. 4) The value-weighed average proceeds of the market present the market normal proceeds. 5) We compare the profitability of the market and of the technique analysis by comparing their risk-recovery ratios. 6) Investors are risk neutral.3. Original data 1. The monthly proceeds of each stock from 1991 to 2001. 2. The market value-weighted average proceeds from 1991 to 2001.4. Sample dataThe portfolio is a dynamic investment portfolio which will change his component stocks at the end of each month. There are always 10 stocks in the portfolio and they share the capital equally. The rules to choose the component stocks are following:1) Data referenced in the step is the proceeds of each stock in last five menthes.2) Compute the standard deviation of the proceeds of each stock in last five menthes.3) Divide the proceeds of each stock in last month by and get the value / 4) Array all stocks in the market with their / value in the degressive order and select the top 10 ones as the component stocks.If a few stocks of the top 10 ones has the /value larger 0.5 or5) more than nest one, then they should be replaced by next ones in the portfolio. 6) When more than 3/4 stocks have the negative / value, the portfolio should not include any stocks and the proceeds in this month is zero.7) If the number of stocks in the market is small, the portfolio will include the stocks with larger / value, but the number of component should be larger than 5.We have 132-month reference data, so we get 127-month sample data to analyze the efficiency of the Chinese stock market. Calculate the risk-recovery ratio of the market and of the portfolio in each month, then compare the profitability of the market and the portfolio through hypothesis tests about the difference between the means of the risk-recovery ration of the market and of the portfolio, we get following table: Table 5-4 Hypothesis Tests and AnalysisSubjectsMeansVariance -Z valueP valueMarket 0.17301.0000060.20050.12551.59780.0559Portfolio0.37350.999996From Table 5-4, we know that the portfolio can defeat the market with confidence of 94.41%. As is know, Chinese stock market has developed for 12 years and the efficiency should be properly improved. Some research also support that the Chinese stock market is already weak-efficient market. To know the efficiency of the Chinese market more clearly, we carried out the hypothesis tests about the difference between the means of the risk-recovery ration of the market and of the portfolio in each year with the sample size of 12. The results are shown by following table and chart: Table 5-5 t-value in yearly hypothesis testsYeart-value3-year M.A of t-value19920.323919930.52858219940.16970.34072819950.6263210.44153519960.4358650.41062919971.4572970.83982819980.5018590.7983419990.4726930.81061620001.1967450.72376620010.6873290.785589Because the sample sizes are small, the result of hypothesizes are not obvious. But t-value has a positive relation with the confidence that the portfolio defeats the market, so from the table and the chart, we know the confidence that the portfolio defeats the mar...