Research On The Evolution Of Chinese Stock Market Efficiency

Capital market efficiency is the center of financial market theory."Efficient Market Hypothesis"gives three forms of capital market's efficiency: weak-form efficiency, semi-strong-form efficiency and strong-form efficiency. However, this classification is not very suitable for testing the efficiency of stock markets in the emerging or transitional economies. The reason is that these stock markets'efficiency is evolving as time goes on. To test whether China's stock markets efficiency has improved we used a methodology based on a time-varying parameter AR(2) model.We test the weak-form efficiency of China's stock markets by examining its evolving behavior over the entire history of the Shanghai and Shenzhen Stock Exchanges. The Kalman Filter estimation technique is applied to the system consisting of a time-varying AR(2) model. A significant autocorrelation of returns, also called predictability, may indicate market inefficiency. Our research shows that, at their initial development stages, both the Shanghai and Shenzhen markets were weak-form inefficient, but the latter is less so than the former. However, the past decade clearly saw a steady convergence of the two markets towards weak-form efficiency owing to the improvements in the market infrastructure, market liquidity, regulation enforcement, and so on. Comparing Two markets'time-varying AR(1) coefficients, we find that Shenzhen and Shanghai markets have the similar evolving path, but the time-varying AR(2) coefficients show that Shenzhen market converges slowly and its'evolving path has a larger volatility.