Efficient Market Hypothesis And The Demonstrational Test In China's Stock Market

Efficient Market Hypothesis was matured in the 1970s. According to the hypothesis, the efficiency of the securities market can be divided into three levels: weak-form efficient, semistrong-form efficient and strong-form efficient. Its core argument is that stock prices can reflect the relevant market information truly and quickly. And through arbitrage portfolio, the short-term deviations between the price and value of the securities can be eliminated, so as to achieve the dynamic balance for the market. Therefore, Efficient Market Hypothesis can be said of the basic theory of the modern finance. Because investment portfolio theory, the capital asset pricing model, and other standard financial classical theory has to be established on the premise that the market is effective. And if there is a long-time deviation between the price and value of securities, the theoretical results of the analyses will be far from the actual data, which makes the theory lose its guiding significance.China's securities market has been established for only 16 years. Though compared with the western mature markets, there is a wide gap in many aspects, but it has gradually played a role properly. Especially, along with the gradual end of the Non-tradable share reform, China's stock market has been broken free from the depressed state, which has resulted in inventors' unprecedented attention. However, whether the bull market resulted from the Non-tradable share reform means the improvement of the stock market or not need to be discussed. Given the strong guiding significance of Efficient Market Hypothesis for academic research and actual investment, this thesis will make an objective evaluation for the efficiency of China's stock market from the view of demonstrational test. Firstly, This thesis described the development of Efficient Market Hypothesis in detail, and summarized the former demonstrational test. Then it made a deep analysis for the hypothesis from the perspective of behavioral finance, which is on the opposite of modern standard finance. Secondly, using econometric tools and combining with recent domestic stock market data, this thesis made a demonstrational test for the Efficient Market Hypothesis, which is the core part of this paper. In the test of weak-form efficient hypothesis, this thesis used auto regression, auto correlation function and unit root three models, and got the basically same results. In the test of semistrong-form efficient hypothesis, this thesis used market model, index return model and constant mean return model three ways to estimate the normal return when making use of event study, and the results were also basically same. Lastly, on the base of demonstrational test, the conclusions can be summarized as bellows: weak-form efficient hypothesis has been established in our stock market, so the technical analysis can only play a limited space. And the results from the test of semistrong-form efficient hypothesis showed that given the publication of profits information, though there were no noticeable advance and over reactions, but the lagging response was serious, so by tacking basic information, investors can gain excess return. Therefore, semistrong-form efficient market hypothesis is still not established in China's stock market.