Weak-form Market Efficiency of Shanghai Stock Exchange: An Empirical Study

This paper investigates the weak-form efficient market hypothesis in Shanghai Stock Exchange using the data from April, 1996 to April, 2002. A set of tests based on the CAPM and another set of tests on the trading strategies are used. We propose the tests of the CAPM on two methodologies, which are a preliminary test and the Fama-MacBeth regressions. The first one is based on the CAPM’s assumption that the stock with higher risk should obtain greater return than that with lower risk. In the second approach, we attempt to predict the future rates of return to the portfolios on the basis of risk variables estimated in previous periods. The empirical results suggest that there is no positive or linear relation existing between the individual stocks ’ returns and their market betas, and that non-beta risks also affect expected returns. Though we test the CAPM under several auxiliary assumptions, no evidence seems favorable to the proposition that the CAPM holds. The empirical tests of the CAPM do not provide any support for the weak-form efficient market hypothesis. This paper further documents the significantly abnormal returns generated by the contrarian strategies, which buy th