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The Impact Of Foreign Institutional Investors In China’s Capital Market Efficiency

Posted on:2015-04-14Degree:MasterType:Thesis
Country:ChinaCandidate:Y MengFull Text:PDF
GTID:2309330434452410Subject:Finance
Abstract/Summary:PDF Full Text Request
According to the efficient market hypothesis, there are three common forms commonly stated-weak-form efficiency, semi-strong-form efficiency and strong-form efficiency. And it is generally agreed that international capital markets like the United States have reached weak-form efficiency, which means stock prices can fully reflect their historical information and investors should not use the historical information to predict future earnings. The efficient market hypothesis as the foundation of modern financial theory, but some of the assumptions of the theory has suffered questioned, such as the assumption that investors is rational and the assumption that reflect the information randomly, meanwhile, there are a lot of empirical research shows that the stock market exists some anomalies such as momentum effect, reverse effect and the January effect in small companies. Investors includes individual and institutional investors and the institutional investors which is considered to have more channels of information and professional analysis capacity than individual investors, have become a mainstream investment power, and therefore the studies of institutional investors on the stock market is very important. With the financial globalization and liberalization, China must open to foreign institutional investors in capital markets, therefore we introduced QFII, which is known as value investment strategy and plays more and more important role in our capital market, therefore it is necessary to research the impact on which the foreign institutional investors have the efficiency of China’s stock market because of its considerable theoretical and practical significance. We can judge whether the market is weak-form efficiency according to whether time series of the stock returns is autocorrelation by the unit root test, however, this paper applies long-term memory as a measure of efficiency of stock market, because stock market existing long-term memory means that the investors can partly predict the future’s returns using historical information, that is not weak-form efficiency. This paper studies the impact of foreign institutional investors on the China’s stock market efficiency from the theoretical description to empirical test. There are two theories, that is the theory of financial liberalization and the theory of the efficient market hypothesis, which Provide theoretical support for my paper. In empirical terms, this paper applies long-term memory as a measure of efficiency of stock market and there are many methods for testing long-term memory in stationary time series, and this paper applies R/S analysis to calculate H values as the representative of the market efficiency. According to the time window rolling method we can calculate a time series of H values from the time series of index yield, which concludes existing long-term memory in the Chinese stock market, and the conclusion means that the Chinese stock market hasn’t reach the condition of weak-form efficiency. Moreover, we find that the mean values of H did not change significantly after the introduction of QFII by T-test, which means the efficiency of China’s stock market does not improve after the introduction of QFII. This paper applies the time series QFII investment scale to the time series of H values by regression analysis for researching on the impact of foreign institutional investors in China’s stock market. The first step is to analyses the impact of the domestic institutional investors, and the second step is to analyses the impact of the foreign institutional investors, and the last step is to analyses the impact of domestic institutional investors and foreign institutional investors jointly, and we reach the same conclusion that domestic institutional investors have no impact on the Chinese stock market, but foreign institutional investors undermine the efficiency of the China’s stock market.According to empirical results this paper makes some explanations and policy recommendations. Firstly, that the Chinese stock market has not reached a weak-form efficiency and the efficiency of China’s stock market didn’t improved significantly, one reason is that the original purpose of the establishment of the capital market is served for the financing of state-owned enterprise and the existence of institutional problems, which distorts the allocation of resources by capital market pricing.Another reasons is that China’s stock market just experiences a short-time development,which leads to the markets is still not mature and perfect enough. Therefore, the government should make some market-oriented reforms, such abolishing the China’s administrative examination and approval system of IPO and refinancing. Meanwhile, we should improve the information disclosure system so that listed companies must timely and completely disclose the real information. Secondly, domestic institutional investors did not improve the efficiency of the stock market because domestic institutional investors began to develop in2001and hasn’t been mature, even existing non-rational noise trading and domestic fund companies still exist principal-agent problem. Therefore, we need to cultivate the value investment strategy of domestic institutional investors and improve the fund’s governance structure to improve the agency problem. Finally, foreign institutional investors QFII undermined the efficiency of the market, mainly because that QFII want to pursue to maximize their own interests by short-term behavior and so on with the presence of problems and defects in the Chinese capital market. Therefore, we should improve the level of information disclosure and regulation of QFII.
Keywords/Search Tags:foreign institutional investors, market efficiency, long-term memory, financial liberalization
PDF Full Text Request
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