Time-Varying Return Predictability in the Chinese Stock Market

• Main Authors: Huai-Long Shi, Zhi-Qiang Jiang, Wei-Xing Zhou
• Format: Article
• Language: English
• Published: World Scientific Publishing 2017-03-01
• Series: Reports in Advances of Physical Sciences
• Subjects: Econophysics; return predictability; adaptive market hypothesis; variance ratio test; generalized spectral test
• Online Access: http://www.worldscientific.com/doi/pdf/10.1142/S2424942417400023
• ISSN: 2424-9424; 2529-752X

China’s stock market is the largest emerging market in the world. It is widely accepted that the Chinese stock market is far from efficiency and it possesses possible linear and nonlinear dependencies. We study the predictability of returns in the Chinese stock market by employing the wild bootstrap automatic variance ratio test and the generalized spectral test. We find that the return predictability vary over time and a significant return predictability is observed around market turmoils. Our findings are consistent with the Adaptive Markets Hypothesis (AMH) and have practical implications for market participants and policy makers. A predictability index can be constructed for each asset, which might help warn a crisis is in store, ease the development of the ongoing bubble, and stabilize the market.