How efficient is Chinese financial market
Introduction
Financial market is a significant factor in economy development. Through financial market, people are able to transfer their surplus funds to those who have shortage which enhance efficiency. China's financial market started relatively late compared with developed countries. After the economy reform in 1978, China's step by step build up its own financial system. With the continuous improvement of the financial markets, people are started to question about whether China's financial market can perform efficiently. According to Eugene Fama's efficient market hypothesis (EMH), at a efficient market, the asset prices should reflect all publicly available information about the value of an asset. In other words, investors cannot forecast future stock prices using current available information (Mankiw, 2007).
This essay aims at discussing the efficiency of China's financial market. Firstly, previous work on China's financial market efficiency will be introduced. And a empirical study on China's financial market efficiency using the runs test and serial correlation will be presented in second section. The reasons related to China's financial market inefficiency will be discussed in third section. A brief conclusion will be given at the end of essay.
Empirical studies over China's financial market efficiency.
According to the EMH, there are three types of efficiency: weak form, semi-strong and strong form. The debate over China's financial market efficiency is mainly focus on the first type-the weak form efficiency. A capital market is said to be weakly efficient if its current share price fully reflects the historical information. Thus the preceding strategy would not be able to generate profits if weak form efficiency holds (Hillier, Ross, Westerfield, Jaffe and Jordan,2010). According to weak form's definition, it can be tested by performing a serial correlation test and runs test: if the stock prices at time t are not correlated with its previous
Financial market is a significant factor in economy development. Through financial market, people are able to transfer their surplus funds to those who have shortage which enhance efficiency. China's financial market started relatively late compared with developed countries. After the economy reform in 1978, China's step by step build up its own financial system. With the continuous improvement of the financial markets, people are started to question about whether China's financial market can perform efficiently. According to Eugene Fama's efficient market hypothesis (EMH), at a efficient market, the asset prices should reflect all publicly available information about the value of an asset. In other words, investors cannot forecast future stock prices using current available information (Mankiw, 2007).
This essay aims at discussing the efficiency of China's financial market. Firstly, previous work on China's financial market efficiency will be introduced. And a empirical study on China's financial market efficiency using the runs test and serial correlation will be presented in second section. The reasons related to China's financial market inefficiency will be discussed in third section. A brief conclusion will be given at the end of essay.
Empirical studies over China's financial market efficiency.
According to the EMH, there are three types of efficiency: weak form, semi-strong and strong form. The debate over China's financial market efficiency is mainly focus on the first type-the weak form efficiency. A capital market is said to be weakly efficient if its current share price fully reflects the historical information. Thus the preceding strategy would not be able to generate profits if weak form efficiency holds (Hillier, Ross, Westerfield, Jaffe and Jordan,2010). According to weak form's definition, it can be tested by performing a serial correlation test and runs test: if the stock prices at time t are not correlated with its previous