Research On Market Efficiency, CAPM Anomalies And The Predictability Of China Stock Market

Based on efficient market hypothesis(EMH), Markowitz Published his famous article "Portfolio selection", which lied the foundation of modern investment theory. After that, under the assumption of general market equilibrium, Sharpe(1964), Lintner(1965) and Mossin(1966) put forward the theory of capital asset pricing model(CAPM) respectively. In the theory, they associate the return of the asset with its risk. Coming from the strict assumptions of EMH, CAPM are in face of the challenge from empirical tests. Anomalies including "Size Effect","Idiosyncratic Risk Effect" and "Value Premium" make CAPM less persuasive in explaining the return of asset. To improve this model, Fama, French(1990,1992) first attributed the risk of size factor and value factor, and created the famous "FF three-factor" model. Then, this model successfully explained the differences in the returns of various assets, and acquired the support from empirical effort then.In this paper, we exam the zero-beta CAPM theory in Shanghai and Shenzhen security market based on the likelihood ratio test from June.2007to June.2011. In the test, we use four different portfolio grouping methods according to the historical beta estimator, idiosyncratic volatility risk, stock price and firm size. The empirical results show that:(1) On the whole sample period, the Shanghai and Shenzhen stock composite index, using traditional historical beta grouping method, can be mean-variance efficient.(2) Differ with the results of Shanghai market, Shenzhen has a higher coefficient of determination in the CAPM regression.(3) CAPM can effectively explain the market risk premium in Shanghai and Shenzhen stock market.(4) There are "Size effect" and "price effect" in Shanghai Stock and Shenzhen stock exchange, the portfolio of low prices and small-scale has a higher expected excess return. On the other hand, the Shenzhen market also exists a certain degree of idiosyncratic volatility premium, which means that the expected excess return increases with idiosyncratic risk.In addition, we applied the new version of FF factor model, which attributed the liquidity factor to the three-factor model, to verify the above results. Comparing with zero-beta CAPM analysis, it is found that the results of Shanghai and Shenzhen market are also inconsistent:Anomalies of "Size effect" and "Price effect" of Shanghai stock market can be explained by the factor of size, value premium factor and mobility compensation factor. On the Shenzhen stock market, the idiosyncratic risk can be explained by factor of size and liquidity premium factor; compensation of scale is the main cause of "price effect"; liquidity premium is not the reason of "Size effect". At the end of the research, we explore this model to validate the predictability of Shanghai and Shenzhen stock market. The results show that this version of FF factor model is significant in the sense of economic, and Shenzhen stock market is much better than Shanghai. The above empirical results for stock returns in the Chinese stock market, has a certain practical significance in predicting the return of the market and in detecting anomalies in the Shanghai and Shenzhen Stock Market.