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The role of WTO accession in China’s stock market efficiency and predictability

Dong, Wei and Yin, Caihong (2008)
Department of Economics
Abstract
This paper examines the weak form EMH regarding to the china’s stock markets and the role of WTO accession in the market efficiency. We consider A share and B share and composite index traded on the Shanghai Stock Exchange and Shenzhen Stock Exchange using daily data for 6 indexes for the period from the earliest available data to 2008/03/14. We assume WTO accession plays a positive role in the China’s stock market efficiency due to financial liberalization according to the commitments made for joining in WTO. Two sub-samples are created based on the entering date of 2001/12/11 to exam the changes of market efficiency. We begin by using variance ratio method to exam the weak-form market efficiency. We find that markets of Shanghai A share... (More)
This paper examines the weak form EMH regarding to the china’s stock markets and the role of WTO accession in the market efficiency. We consider A share and B share and composite index traded on the Shanghai Stock Exchange and Shenzhen Stock Exchange using daily data for 6 indexes for the period from the earliest available data to 2008/03/14. We assume WTO accession plays a positive role in the China’s stock market efficiency due to financial liberalization according to the commitments made for joining in WTO. Two sub-samples are created based on the entering date of 2001/12/11 to exam the changes of market efficiency. We begin by using variance ratio method to exam the weak-form market efficiency. We find that markets of Shanghai A share index, Shanghai composite index, Shenzhen B share index have become efficient after WTO event and the rest of the three indexes are still inefficient even after WTO event, however, we can observe that the market efficiency indeed got improved for these three inefficient markets, giving evidence that the WTO accession plays a positive role in the market efficiency. We process our research further by building ARMA model to predict future stock prices and returns for inefficient markets and use regression technique to examine the relation between the real returns and forecasted returns in order to see whether the moving pattern of forecasted returns are consistent with the real returns. If they are, implying investors can use the established ARMA model to gain abnormal returns, otherwise, investors can not gain. The results indicate that none of the established ARMA models can be used to gain the abnormal returns. (Less)
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@misc{1644185,
  abstract     = {This paper examines the weak form EMH regarding to the china’s stock markets and the role of WTO accession in the market efficiency. We consider A share and B share and composite index traded on the Shanghai Stock Exchange and Shenzhen Stock Exchange using daily data for 6 indexes for the period from the earliest available data to 2008/03/14. We assume WTO accession plays a positive role in the China’s stock market efficiency due to financial liberalization according to the commitments made for joining in WTO. Two sub-samples are created based on the entering date of 2001/12/11 to exam the changes of market efficiency. We begin by using variance ratio method to exam the weak-form market efficiency. We find that markets of Shanghai A share index, Shanghai composite index, Shenzhen B share index have become efficient after WTO event and the rest of the three indexes are still inefficient even after WTO event, however, we can observe that the market efficiency indeed got improved for these three inefficient markets, giving evidence that the WTO accession plays a positive role in the market efficiency. We process our research further by building ARMA model to predict future stock prices and returns for inefficient markets and use regression technique to examine the relation between the real returns and forecasted returns in order to see whether the moving pattern of forecasted returns are consistent with the real returns. If they are, implying investors can use the established ARMA model to gain abnormal returns, otherwise, investors can not gain. The results indicate that none of the established ARMA models can be used to gain the abnormal returns.},
  author       = {Dong, Wei and Yin, Caihong},
  keyword      = {WTO,Chinese Stock Market,weak-form EMH,predictability,Economics, econometrics, economic theory, economic systems, economic policy,Nationalekonomi, ekonometri, ekonomisk teori, ekonomiska system, ekonomisk politik},
  language     = {eng},
  note         = {Student Paper},
  title        = {The role of WTO accession in China’s stock market efficiency and predictability},
  year         = {2008},
}