Are Chinese stock markets efficient? Further evidence from a battery of nonlinearity tests

Abstract

Given that the efficiency of the Chinese stock markets was empirically examined in extant literature using statistical tests that are designed to uncover linear correlations of price changes, the obtained statistical inferences of efficiency/inefficiency are on very shaky grounds as highlighted in a recent article by Saadi et al. (2006). Motivated by this concern, the present article re-examines the efficiency of the A- and B-shares markets in Shanghai and Shenzhen Stock Exchanges (SHSE and SZSE) using a battery of nonlinearity tests. The empirical investigation reveals strong evidence of nonlinear serial dependence in the underlying returns generating processes for all indices even after removing linear serial correlations from the data, hence, contradicting the unpredictable criterion of weak-form efficient market hypothesis. Theoretically, these results are not surprising given the fact that investors in the Chinese stock markets trade like noise traders, who purely speculate and treat the market like a casino.

Financial Ratios and Stock Returns on China’s Growth Enterprise Market

“…Elliott and Yan (2013) document extremely high average annual turnover rate in the Chinese stock markets during 2008-2012, average 341% (as high as 666%) when only floating shares are considered, compared to the US rate of 188%. Researchers (Xiao, 2006;Lim and Brooks, 2009;Chen, et al, 2010) examining stock valuations in China generally find little relationship to company fundamentals; investors tend to speculate more like noise traders in a casino fashion; and stock prices are less informative in China than they are in the U.S. Wu (2011) finds that neither size nor market factor matters in valuation, also the value effect is limited only for the SSE listed stocks. Goldstein, et al (2013) show "theoretically that undesirable coordination across speculators makes the market less informative, decreases real investment, and increases stock market volatility."…”

Cross‐market Trading in China's Large State‐owned Commercial Banks, 2006–2011

“…The large SOCBs stand out from the broader range of dual‐listed stocks previously studied, however, not just because of their overall trading volumes but also because their size makes them more the province of institutional investors than other smaller capitalization stocks (Bailey et al 2009). Prior evidence of the Shanghai and Hong Kong markets being segmented could reflect not only the limitations on individual mainland Chinese investors purchasing shares in offshore markets like Hong Kong but also allegations that these investors “trade like noise traders, who purely speculate and treat the market like a casino” (Lim and Brooks 2009, 153) 7 . The SOCB data can help shed light on whether trading in the large capitalization SOCBs is more systematic across the two markets.…”

Testing the Information Efficiency in Emerging Markets

“…It relects how the inancial asset prices adapt to the incoming information. The quicker it relects the more informational eicient the market will be, making it hard for these investors to beat the market [3,4].…”