Time-varying Efficiency and the Adaptive Market Hypothesis: Evidence from Chinese A-share Stock Market

17 Pages Posted: 28 Oct 2019

See all articles by Zipei Zhu

Zipei Zhu

Cornell University - School of Hotel Administration

Date Written: December 13, 2017


With the continuous questioning of the efficient market hypothesis and the booming development of behavioral finance theory, the basic framework of financial economics becomes increasingly blurred. Meanwhile, the adaptive market hypothesis proposed by Lo (2004), underscoring time-varying market efficiency, introduces the idea of biology and evolution into modern finance to reconcile the two mainstream theories. This paper uses the Shanghai Composite Index and Shenzhen Composite Index from two Chinese stock markets and adopts AR(1) model, ARIMA model, variance ratio test and automatic portmanteau test with rolling windows to test the time-varying efficiency of Chinese markets. On the other hand, GARCH model is adopted to study the dynamic relationship between return and risk with analysis of the mechanism behind the market. The results of the research support the adaptive market hypothesis: the results of the full sample test show that the Chinese market as a whole is inefficient, and there is no trend of efficiency growing monotonously. Although most results of sub-sample analysis demonstrate weak-form market efficiency, there exist numerous periods with predictable return, which demonstrates a two-or-three-year cycle. Besides, the relationship between risk and return is very unstable, reflecting investors’ time-varying risk preferences.

Keywords: Efficient Market Hypothesis, Adaptive Market Hypothesis, Efficiency Test, GARCH

JEL Classification: G14, G15

Suggested Citation

Zhu, Zipei, Time-varying Efficiency and the Adaptive Market Hypothesis: Evidence from Chinese A-share Stock Market (December 13, 2017). Available at SSRN: https://ssrn.com/abstract=3471649 or http://dx.doi.org/10.2139/ssrn.3471649

Zipei Zhu (Contact Author)

Cornell University - School of Hotel Administration ( email )

435B Statler Hall
Ithaca, NY 14853-6902
United States
607 279 1937 (Phone)

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