A Test Of The Martingale Difference Hypothesis For Weak Efficiency In China's Stock Market

One of the great exercises of financial research is to examine the efficiency of the stock markets.There are many reasons for this endeavor.One is due to the importance efficiency has on the allocation of capital and the impact on economic activity.Others center on the desire to build a foundation for many modern capital market theories. Its descriptive definition is that in an efficient market any new information would be immediately and fully reflected in equity prices.Consequently,a financial market quickly,if not instantaneously,discounts all available information.Therefore,in an efficient market,investors should expect an asset price to reflect its true fundamental value at all times.At present,many modern capital market theories implied the Efficient Market Hypothesis.Meanwhile,a lot of financial markets models are based on this assumption.Efficient capital market can be more accurate on the allocation of resource and the pricing of asset.Besides,it can help investors to determine the market trend.In some developed western financial markets,the Efficient Market Hypothesis has been supported by a great deal of empirical results.Therefore theories based on the "Efficient Market Hypothesis" in these developed financial markets are useful While China is still in its developing stage,the capital market, especially the stock market has been established for a short period of time.There are a number of imperfections existing in the corresponding policies,regulations,systems, etc.Thus,there is a strong guiding significance of China's development and application of advanced financial theory and models,by studying the efficiency of China's capital market to determine its degree of maturity.At the same time,research on the market efficiency can not only trace the root of market imperfections,but also propel market legislation and improve the regulatory standard.In this paper we adopt a new Statistical method for the efficiency of China's stock markets.Recently,Kuan and Lee propose a new class of tests to examine if a time series is a martingale difference sequence.In contrast with the autocorrelation-based tests and the spectrum-based tests;the proposed test requires a weaker moment condition and has power against a much larger class of non-martingale difference alternatives that may be linear or nonlinear correlated.Moreover,this test does not rely on the assumption of conditional homoskedasticity.As compared with many existing consistent tests,this test is easy to implement and has a standard limiting distribution.The study will involve a ten year period ending February 27,2009.Empirical test indicates that Shanghai Stock Index and Shanghai & Shenzhen 300 Index are efficient stock markets;however Shenzhen Composite Index,Shanghai B-share index and Shenzhen B-share index refuse the market efficiency hypothesis.Comparing Test results of A shares and B shares in both stock markets,We found that Shanghai index statistics obviously smaller than B shares,which supported the previously general conclusions,that A-share market is more efficient than B-share market.Nevertheless, the Shenzhen Composite Index and the Shenzhen B-share's statistics are very similar, and the results adopted validity of assumptions except the final data.This also reflects Shenzhen B shares which transact in HK dollars,and H shares in Hong Kong has a very strong linkage effects.It is precisely because of this linkage led to the efficiency of Shenzhen B share market.In the further course of the study,this paper divides stock markets into different stages,including the overseas market and the domestic market. This practice proved that a large bull and bear markets often lead to lack of efficiency, while both the mature overseas market and the domestic market have shown a better efficiency in general turbulence period.Over the past decade,the efficiency of HK stock market appears signs of deterioration year by year,which maybe caused by the impact of financial crisis,besides the huge fluctuations of Red Chips in HK market cannot be ignored.