Testing Weak-Form Efficiency of Chinese Stock Market - Literature review Example

A specific concern of this review involves the weak-form of market efficiency. Ho and Lee (2004) provided deep insights in this aspect, outlining background information as well as an outline of empirical evidences that defined, explained and determined weak-form efficiencies in stock market such as those in the United States. Chandra (2008, pp.423) also explained relevant hypotheses such as how current price of a stock reflects all information found in the record of past prices and volumes, which is translated to the argument that past and future price movements are not related.

A very important aspect in the existing literature on stock market efficiency is the testing process and methodology. This makes sense because in order to determine the performance and output of a specific stock market, it must be assessed or tested for efficiency. In this regard, numerous studies were undertaken. For instance, the works of Campbell, Lo and MacKinlay (1997) as well as Barber and Lyon (1997) and Loughran and Ritter (2000) demonstrated and examined the conventional strategies for testing performance under normal economic conditions.

The information provided by Preston and Collins (1966) is quite helpful for this study. The researchers outlined the criteria by which stock market efficiency could be appraised. . A review of the corpus of literature demonstrate high amount of work done on weak market efficiency. One of the earliest to have investigated this theme is Fama (1965), who found a serial correlation from among the top stocks listed in the American stock market by evaluating time-dependence that occur in the current and past returns.

Further studies have argued in favor of adding additional variables such as when Campbell and Shiller (1988) and Harvey (1995) found the need to include financial and macroeconomic variables in the outcome and distribution of return rate. Review of empirical evidence on weak-form efficiency from developed Market The general consensus, at least from the perspective of most researchers such as Fama (1970), Bhatti, Campbell et al., Al-Shanfari and Hossain (2006), Lim (2008), is that market efficiency is not realistic.

Groh (2009, pp.5) explained that as a result of such condition, there must exist adequate opportunities for profit, which are the same as inefficiencies, compensating investors in the process for the cost incurred in the trading and other market activities. Abramowicz, Maciaszek and Wecel (2011, pp.113) echoed this, as they reported that although possible – though only demonstrated in its higher probability in developed markets – market efficiency is not realistic. These claims were validated by the work of Moyer et al.

(2012, pp.48) who reported in their investigation that the US markets are efficient in the weak-form context. Another study that supports this position is that one undertaken by Dow and Gorton (1997). In this study, it was found that economic efficiency has insignificant an impact on stock market efficiency. What this means is that wealthy