Efficient Market Hypothesis:Empirical Evidence From Stock Index And Its P/E Ratio

Efficient Market Hypothesis comes to mature in 1970s with a theoretical framework. It is regarded as a milestone in the development of modern theories of Finance. Portfolio theory and asset pricing theory holds under the hypothesis that is the complete competition of rational investors drives asset prices to equilibrium. In other words, efficient market hypothesis must hold as a foundation of Portfolio theory and asset pricing theory.The fundamental meaning of the efficient market hypothesis is that prices of securities fully reflect all relevant information quickly. Depending on the definition of information, the efficient market hypothesis efficient market hypothesis can be divided into weak, semi-strong and strong form efficient market hypothesis. On the basis of research from mature markets, domestic scholars contribute considerable amount of empirical papers on whether the efficient market hypothesis hold in the Chinese stock market. A lot of interesting findings are given, but with some disagreement and deficiencies. This paper aims to research on the efficiency of the Chinese stock market with appropriate methods, as a complement to previous domestic studies.This paper first discusses the theory of efficient market hypothesis, followed by review of domestic and foreign literature. On the basis of literature review, this paper researches the efficiency of China’s stock market using index data from 1996 to 2013. ADF test, correlation test and runs test are used to study the weak form efficiency. Semi-strong form efficient market hypothesis is tested from the perspective of the predictive power of price-earnings ratio. Empirical conclusions are as follows. Firstly, China’s stock market is characterized by the presence of weak form efficiency after 2005; weak form efficiency gradually increases during development of China’s stock market. Secondly, price-earnings ratio has significant predictive power over long-run stock return with a negative correlation; the semi-strong efficient market hypothesis does not hold in China’s stock market; Shanghai stock market is more efficient than Shenzhen stock market.