Comparing Chinese Financial Markets Behavior To The Geometric Brownian Motion Process

This study examines the behavior of the Chinese financial markets with regards to the Geometric Brownian motion process.It uses the daily,weekly and monthly stock prices trading in the Chinese securities exchanges,all the more particularly the CNY/US$,SSE Composite Index,ICBC,CITIC Securities Co.,Ltd.SZSE Component Index,Petro China,and Bank Of China..The assumptions underlying the Geometric Brownian motion in finance,namely the stationarity,the normality and the independence of stock returns,are tested using both graphical(histograms and normal plots)and statistical test(Kolmogorov-Simirnov test,Box-Ljung statistic and Augmented Dickey-Fuller test)methods to check whether or not the Brownian motion as a model for Chinese financial markets holds.The Hurst exponent or independence index is also applied to support the results from the previous test.Theoretically,the independent or Geometric Brownian motion time series should be characterized by the Hurst exponent of 1/2.A value of a Hurst exponent different from that would indicate the presence of long memory or fractional Brownian motion in a time series.The study shows that at least one assumption is violated when the Geometric Brownian motion process is examined,assumption by assumption.It also reveals the presence of both long memory and random walk or Geometric Brownian motion in the Chinese financial markets returns when the Hurst index analysis is used and finds that the Currency market is the most efficient of the Chinese financial markets.The study concludes that although some assumptions underlying the process are violated,the Brownian motion as a model in Chinese financial markets cannot be rejected.It can be accepted in some instances if some parameters such as the Hurst exponent are added.