Study On Index Volatility And Stock Market Effectiveness

The market effectiveness is a fundamental question in the study of stock market, which is directly related to the efficiency of the allocation of capital and has a tremendous impact on the development and stability of macroeconomy. Since the establishment of the Shanghai Stock Exchange at the end of 1990, China's stock market has experienced 18 years of development course. Compared with the glorious and more mature markets with longer histories, such as those in Britain and the United States, the Chinese stock market started late and had been imposed more policy restrictions. Therefore, the market response to the economical information is not sensitive and rational enough and lacks some sense of norms. However, if carefully reviewed, the history of the Chinese stock market development displays a difficult but rapid growth course. Then it's necessary for us to research in the effectiveness of the Chinese stock market.Compared to consensus of foreign scholars on the weak-efficiency of Britain and the United States stock market, our domestic scholars hold different answers to the effectiveness problem of Chinese stock market. Some researchers said that the stock market had reached weak-efficiency, while others argued that it's not true.In this paper, theories on effectiveness of stock market were discussed first from domestic and foreign views. Then it's determined that to test the effectiveness of Chinese stock market is the core of the following study and empirical analysis. Through processing the closing prices of the Shanghai Composite Index (4259 in all from 19 Dec, 1990 to 30 Apr, 2008), the Shenzhen Component Index (4168 in all from 3 Apr, 1991 to 30 Apr, 2008) and the Shanghai and Shenzhen 300 Index (745 in all from 8 Apr, 2005 to 30 Apr, 2008), it comes to the conclusion that the Shanghai stock market, the Shenzhen stock market and the Shanghai and Shenzhen overall stock market have not reach the status of weak-efficiency. If reviewed in more detail by dividing the sample data of Shanghai and Shenzhen stock market separately into two sections by the year 1993 with the former and the year 1997 with the latter, it is clear that Shenzhen stock market has progressed less than the Shanghai stock market, which advanced into somehow weak-efficiency, if not completely, which is similar to the situation of Shanghai and Shenzhen overall stock market.Autocorrelation analysis of the residual sequence is employed to test the random-walk characteristic of logarithm of the closing price of the index. GARCH (1,1) is also employed to model the logarithm of the closing price of the index and its one order lag sequence. By above ways, we can conclude that Chinese stock market has not reach weak-efficiency. Other phenomenon of weak-effective market was discussed. The day-of-the-week effect was analyzed but it is perceived not so clear in Chinese stock market.The reasons of non-efficiency of Chinese stock market were discussed at the end of this paper and some targeted suggestions were presented.