Study On The Efficiency Of China's Stock Markets

Since the official stock exchanges, Shanghai Stock Exchange and Shenzhen Stock Exchange, were established in December 1990 and April 1991 respectively, China's Stock Markets (CSMs) have expanded rapidly. By April 2003, there were 1243 listed companies with market capitalization of 4268 billion RMB. Recently, the efficiency of CSMs became a focus in the field of financial theory in China. Are China's Stock Markets really weak efficient, How to test the level of CSMs's efficiency, and How to improve the efficiency of CSMs are the urgent tasks of China's financial theory circle. This thesis is founded on these backgrounds above.Firstly, this paper makes clear the meaning of stock markets' efficiency through different perspectives, and then introduces the Efficient Market Hypothesis (EMH) and Fractal Market Hypothesis (FMH). As one important part of rational anticipation theory, EMH is the foundation of capital market theories, but the linear paradigm of EMH does not conform to the stock market realities. However, based on non-linear method, FMH depicts the facts of stock markets.Secondly, this treatise summarize the methods of how to test the efficiency of stock markets, such as serial correlation test, run test, and filter test. And then, the paper empirically tests the return of composite index of Shanghai Stock Exchange and component index of Shenzhen Stock Exchange. The outcome of the test indicates that the distributions of the returns do not follow normal distribution, and that the distribution of the daily data, weekly data, and monthly data are similar. So this thesis figures that Rescaled Range Analysis(R/S Analysis) is superior to other methods with regard to testing China's stock markets.Consequently, I applied the R/S analysis on the composite index of Shanghai Stock Exchange and component index of Shenzhen Stock Exchange from 1996 to 2001, to study the fractal structure of CSMs. The result of the analysis shows that the returns of the indexes do not obey Brownian Motion, but follow a biased Random Walk with Hurst exponent being 0.63 and 0.65 respectively. Hence, we can conclude that the China's Stock Markets are not yet efficient informationally.Finally, this thesis researches the factors that result in the low efficiency of CSMs, and point out the practical path to improve the efficiency of China Stock Markets.