CHINESE STOCK MARKET

Chinese Stock Market

Abstract

This study employs single and multiple variance ratio tests to re-examine the weak-form efficient market hypothesis (EMH) of A- and B-shares on the Shanghai and Shenzhen exchanges in Chinese stock market. The study also examines the influence of the release of investment restriction of B-share markets on market efficiency. For the whole sample period, the weak-form EMH is only supported for Shanghai A-shares, and is not supported for the remaining shares. For the sub-sample period, the Shenzhen A-share and B-shares of both exchanges being rejected for the weak-form EMH in the earlier sample period are supported following the regulatory change. Rolling multiple variance ratio test statistic values provide additional evidence of weak-form EMH. The improvement of market efficiency can be explained by the increased liquidity and maturity accompanying deregulation and liberalization. This study also examines the weak market efficiency along with the demonstration of the weak market efficiency and separates the bull, bear and normal market of Chinese stocks.

Table of Content

ABSTRACTII

CHAPTER I: INTRODUCTION1

Introduction1

Background of the study4

Aims and objectives of the Study10

Scope of the Study10

CHAPTER II: LITERATURE REVIEW13

Stock market development and the role of banks in China20

Bull and Bear Markets28

Normal Markets33

CHAPTER III: METHODOLOGY40

LOMAC variance ratio test40

Ranks-based and signs-based variance ratio tests42

Multiple variance ratio tests45

Testing the EMH48

CHAPTER IV: RESULTS AND ANALYSIS56

Data description and preliminary analysis56

Variance ratio tests of the stock indices associated with the Shanghai and Shenzhen exchanges62

The impact of releasing investing restriction of B-share markets to market efficiency70

REFERENCES85

Chapter I: Introduction

Introduction

A unique characteristic of the Chinese stock markets (the Shanghai and Shenzhen exchanges) is the segmentation between A-shares and B-shares. The ownership of A-shares, which are denominated in Chinese Renminbi, is restricted to domestic investors, while B-shares, which trade in $US in Shanghai and $HK in Shenzhen, have traditionally been the exclusive preserve of foreign investors. On 17 February 2001, the Chinese government relaxed the long-standing rule governing the trading of B-shares and widened the market to include domestic investors. An interesting issue that arises from this regulatory change concerns the efficiency of the markets. In particular, it is unclear how the regulatory change has impacted the relative efficiency of the A- and B-share markets. One school of thought contends that the regulatory change may have increased the pricing efficiency of the B-share market. This contention is based on the premise that foreign investors have less information about Chinese companies than their domestic counterparts because of difficulties in accessing information on B-shares (Chakravarty et al., 1998, and [Chan et al., 2006]).4 On the other hand, it may be that the regulatory change has resulted in greater efficiency in the A-share market; some commentators have argued that the Chinese government's control of the domestic media restricts information to A-share investors and causes them to rely on B-share investors for information (Chui and Kwok, 1998], [Sjöö and Zhang, 2000] and [Yang, 2003]).

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