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Are Chinese stock markets efficient? A cointegration and causality analysis

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  • Xiaming Liu
  • Haiyan Song
  • Peter Romilly

Abstract

Established in December 1990 and July 1991 respectively, the Shanghai and Shenzhen Stock Exchanges are the only two official stock markets in China. This paper aims to test for randomness in each stock exchange share price index, and to examine the relationship between the two share price indexes. Statistical evidence shows that both the Shanghai and Shenzhen indexes can be best characterized as random walk processes and therefore the markets are efficient individually. However, the Engle-Granger two-stage cointegration analysis and the Johansen procedure suggest a long-run equilibrium relationship between the two stock prices, while the Granger causality test indicates a feedback relationship between the returns of the Shenzhen and Shanghai shares. These results imply that the stock markets are collectively inefficient.

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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Applied Economics Letters.

Volume (Year): 4 (1997)
Issue (Month): 8 ()
Pages: 511-515

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Handle: RePEc:taf:apeclt:v:4:y:1997:i:8:p:511-515

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Cited by:
  1. Amélie Charles & Olivier Darne, 2009. "The random walk hypothesis for Chinese stock markets: Evidence from variance ratio tests," Post-Print hal-00771080, HAL.
  2. Narayan, Paresh Kumar, 2006. "The behaviour of US stock prices: Evidence from a threshold autoregressive model," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 71(2), pages 103-108.
  3. Shujie Yao & Dan Luo & Stephen Morgan, . "Shanghai Stock Exchange Composite Index and Bank Stock Prices in China: A Causality Analysis," Discussion Papers 08/25, University of Nottingham, GEP.
  4. Rico Belda, Paz, 2013. "No linealidad y asimetría en el proceso generador del Índice Ibex35/Nonlinearity and Asymmetry in the Generator Process of Ibex35 Index," Estudios de Economía Aplicada, Estudios de Economía Aplicada, vol. 31, pages 555-576, Septiembr.
  5. repec:ebl:ecbull:v:7:y:2006:i:4:p:1-7 is not listed on IDEAS
  6. Chong, Terence Tai-Leung & Lam, Tau-Hing & Yan, Isabel Kit-Ming, 2012. "Is the Chinese stock market really inefficient?," China Economic Review, Elsevier, vol. 23(1), pages 122-137.
  7. Alexakis, Christos, 2010. "Long-run relations among equity indices under different market conditions: Implications on the implementation of statistical arbitrage strategies," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 20(4), pages 389-403, October.
  8. Mubariz Hasanov & Tolga Omay, 2007. "Are the Transition Stock Markets Efficient? Evidence from Non-Linear Unit Root Tests," Central Bank Review, Research and Monetary Policy Department, Central Bank of the Republic of Turkey, vol. 7(2), pages 1-12.
  9. Majumder, Debasish, 2014. "Asset pricing for inefficient markets: Evidence from China and India," The Quarterly Review of Economics and Finance, Elsevier, vol. 54(2), pages 282-291.
  10. Paresh Kumar Narayan, 2005. "Are the Australian and New Zealand stock prices nonlinear with a unit root?," Applied Economics, Taylor & Francis Journals, vol. 37(18), pages 2161-2166.
  11. Chan, Kam C. & Fung, Hung-Gay & Thapa, Samanta, 2007. "China financial research: A review and synthesis," International Review of Economics & Finance, Elsevier, vol. 16(3), pages 416-428.
  12. Buguk, Cumhur & Wade Brorsen, B., 2003. "Testing weak-form market efficiency: Evidence from the Istanbul Stock Exchange," International Review of Financial Analysis, Elsevier, vol. 12(5), pages 579-590.
  13. Paresh Narayan & Arti Prasad, 2007. "Mean Reversion in Stock Prices: New Evidence from Panel Unit Root Tests for Seventeen European Countries," Economics Bulletin, AccessEcon, vol. 3(34), pages 1-6.
  14. Omay, Nazli C. & Karadagli, Ece C., 2010. "Testing Weak Form Market Efficiency for Emerging Economies: A Nonlinear Approach," MPRA Paper 27312, University Library of Munich, Germany.
  15. repec:ebl:ecbull:v:3:y:2007:i:34:p:1-6 is not listed on IDEAS
  16. Frank J. Fabozzi & Radu Tunaru & Tony Wu, 2004. "Modeling Volatility for the Chinese Equity Markets," Annals of Economics and Finance, Society for AEF, vol. 5(1), pages 79-92, May.
  17. Tsangyao Chang & Yang-Cheng Lu, 2006. "Equity Diversification in Two Chinese Share Markets: Old Wine and New Bottle," Economics Bulletin, AccessEcon, vol. 7(4), pages 1-7.

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