Research in International Business and Finance 22 (2008) 351361

Contents lists available at ScienceDirect

Research in International Business

and Finance
j o ur na l ho me pa ge : w w w . e l s e v i e r . c o m / l o c a t e / r i b a f

Further evidence on the efciency of the Chinese stock

markets: A note
Suzanne G.M. Field a,, Juliana Jetty b
a
b

School of Accounting and Finance, University of Dundee, Dundee, Scotland DD1 4HN, United Kingdom
Department of Accounting and Finance, University of Glasgow, University Avenue, Glasgow G12 8QQ, United Kingdom

a r t i c l e

i n f o

Article history:
Received 13 April 2007
Received in revised form 10 January 2008
Accepted 20 February 2008
Available online 29 February 2008
JEL classication:
G14
G15
Keywords:
Chinese stock markets
Market efciency
Variance ratio tests

a b s t r a c t
This paper examines the efciency of the Chinese A-share and Bshare markets following the deregulation of the B-share market
which widened ownership to include domestic investors. Applying parametric and non-parametric variance ratio tests to the daily
data of 370 shares over 19962005, the paper nds that A-shares
are more efcient than B-shares, although the efciency of both
markets has improved following the regulatory change. Overall, the
results suggest that the Chinese stock markets are characterised by
information asymmetry, although the timely access to high quality information that domestic investors enjoy has improved the
efciency of the B-share market.
2008 Elsevier B.V. All rights reserved.

1. Introduction
A unique characteristic of the Chinese stock markets (the Shanghai and Shenzhen exchanges) is the
segmentation between A-shares and B-shares. The ownership of A-shares, which are denominated in
Chinese Renminbi, is restricted to domestic investors, while B-shares, which trade in $US in Shanghai
and $HK in Shenzhen, have traditionally been the exclusive preserve of foreign investors.1 On 17 February 2001, the Chinese government relaxed the long-standing rule governing the trading of B-shares

Corresponding author. Tel.: +44 1382 385148; fax: +44 1382 388421.
E-mail address: s.g.m.eld@dundee.ac.uk (S.G.M. Field).
1
For a detailed account of the Chinese stock exchanges, the reader is referred to Zhang and Yu (1994) and Seddighi and Nian
(2004).
0275-5319/$ see front matter 2008 Elsevier B.V. All rights reserved.
doi:10.1016/j.ribaf.2008.02.002

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S.G.M. Field, J. Jetty / Research in International Business and Finance 22 (2008) 351361

and widened the market to include domestic investors.2,3 An interesting issue that arises from this
regulatory change concerns the efciency of the markets. In particular, it is unclear how the regulatory
change has impacted the relative efciency of the A- and B-share markets. One school of thought contends that the regulatory change may have increased the pricing efciency of the B-share market. This
contention is based on the premise that foreign investors have less information about Chinese companies than their domestic counterparts because of difculties in accessing information on B-shares
(Chakravarty et al., 1998; Chan et al., 2006).4 On the other hand, it may be that the regulatory change
has resulted in greater efciency in the A-share market; some commentators have argued that the
Chinese governments control of the domestic media restricts information to A-share investors and
causes them to rely on B-share investors for information (Chui and Kwok, 1998; Sjo o and Zhang, 2000;
Yang, 2003).5
The main objective of this paper is to investigate the relative efciency of the Chinese A- and Bshare markets. The research has a number of novel features. First, unlike most previous studies which
examine the aggregate Chinese stock market, this paper probes deeper into the time-series properties
of Chinese shares by investigating the comparative efciency of A- and B-shares. Second, the paper
provides direct evidence on the impact of the change in ownership rules on the efciency of the A- and
B-share markets; most previous studies focus on the period preceding the deregulation of the B-share
market.
A third novel feature is that the study adopts a new method to investigate Chinese stock market
efciency. In particular, the study employs the non-parametric ranks-based variance ratio test developed by Wright (2000), as well as the standard Lo and MacKinlay (1988) parametric variance ratio test.
Earlier studies have typically used relatively basic tests of efciency that focus on the extent of serial
dependency and runs in share prices. Crucially, the robustness of some of these methods has been
questioned in the literature (Hsieh, 1991). Finally, the paper employs disaggregated company-level
data rather than index-level data which tend to be used in most previous studies. The results reported
here are therefore free from the distortion which often arises from using index-level data in random
walk tests (Fama, 1965). This distortion, which arises because of thin trading and aggregation effects,
often gives a false impression of price change dependence.
Overall, the results indicate that the A-share market is more efcient than the B-share market.
Furthermore, the regulatory change appears to have had a positive impact on pricing efciency in the
B-share market by reducing the information disadvantage of foreign investors and increasing the speed
of information diffusion. The results also suggest that any ndings on efciency may depend on the
method of analysis employed; in some cases, there were marked differences in the results obtained
from using the parametric and non-parametric testing procedures.
The remainder of this paper is organised as follows. Section 2 presents a brief review of the literature,
while Sections 3 and 4 detail the data used and the methodology employed. Section 5 analyses the
results and Section 6 concludes the paper.

2
There are other regional stock exchanges in China which offer domestic-only shares (for example, the Beijing stock exchange
and the Chengdu stock exchange). However, only the Shanghai and Shenzhen exchanges have been segmented between
and Tang, 2001).
domestic-only and foreign-only shares (Bergstrom
3
Rules governing the ownership of A-shares have also recently been relaxed. Specically, foreign institutional investors
who are approved by the Chinese government (known as Qualied Foreign Institutional Investors) are now permitted to trade
A-shares. However, any capital invested and any related income cannot be repatriated for 3 years (Wang et al., 2004).
4
For example, Chakravarty et al. (1998) argue that foreign investors in the Chinese stock markets may be at an informational
disadvantage relative to domestic investors because: (i) many rms listed on the B-share market do not provide full and prompt
disclosures regarding changes in business conditions; (ii) real time market information and B-share prices are not available; (iii)
the published nancial statements of B-listed companies tend not to be prepared in accordance with international accounting
standards. The authors point out that although these difculties are encountered by all investors, they are reduced for local
investors as they may be able to access local information sources that are unavailable to foreign investors.
5
Proponents of this view argue that foreign investors are better informed and receive news faster than domestic investors
because of the information barriers in China (Chui and Kwok, 1998; Sjo o and Zhang, 2000; Yang, 2003). Some commentators
also argue that the B-share market is likely to be more efcient than the A-share market because foreign investors in China tend
to be large nancial institutions that can, in general, be assumed to have more experience and have access to more advanced
technology to analyse data as compared to domestic investors (Sjo o and Zhang, 2000).

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353

2. A brief review of the literature

A dominant theme in the academic nance literature since the 1960s has been the concept of an
efcient capital market, and a proliferation of papers has investigated the efciency of international
stock markets. In recent years, this spotlight has focused on the Chinese stock market. Detailed conclusions from a comparison of the ndings of this body of literature are difcult due to the different
methods that have been employed. For example, while a few papers have used empirically robust
techniques such as GARCH-type models to investigate the issue, other papers have applied traditional
techniques such as serial correlation and runs tests, which are regarded as not being well-specied
(Lo and MacKinlay, 1988; Hsieh, 1991; Ntim et al., 2007). Different data frequencies for various time
periods also hinder comparisons.
Mookerjee and Yu (1999) tested the random walk hypothesis using daily index data for the Shanghai
and Shenzhen exchanges over the period 19901992. Using serial correlation and runs tests, they
found that the index series of both exchanges failed to support the random walk hypothesis; the
changes in index levels were signicantly correlated and showed positive dependence. These results
are in keeping with Darrat and Zhong (2000) who employed the standard variance ratio test and
a model-comparison test that compared the ex post forecasts from a NAIVE model with those from
ARIMA, GARCH and Articial Neural Network models to study the daily share price behaviour of:
(i) the Shanghai index from its inception in December 1990 to October 1998; and (ii) the Shenzhen
exchange from its inception in April 1991 to October 1998. Similar results were also documented by
Seddighi and Nian (2004) who focused on daily index data for the Shanghai index and eight Shanghailisted companies over the period January 2000 to December 2000. Using autocorrelation, unit root and
ARCH tests, their results suggested that Chinese share prices do not follow a random walk. Mookerjee
and Yu (1999) suggested that the lack of information as a result of limited disclosure regulations, the
inadequate physical and legal infrastructure of the market and the restricted supply of shares could
be factors explaining the observed inefciency.
Ma and Barnes (2001) extended the analysis of Mookerjee and Yu (1999) by examining both indexlevel and individual share price data for the Shanghai and Shenzhen markets from their inception in
the early 1990s1998. Using serial correlation, runs and variance ratio tests, they found that individual
shares displayed a greater level of efciency than did indices.6 In addition, they found that the market for A-shares was weak-form efcient. By contrast, the price series of a large number of B-shares
exhibited signicant predictable components.7 The authors argued that the difference in efciency
between the A- and B-share markets could be attributable to the larger size of the A-share market and
its more liquid trading environment. That A-shares display greater efciency than B-shares has also
been documented by Laurence et al. (1997) using serial correlation tests, Wang et al. (2004) using runs
and serial correlation tests and Cajueiro and Tabak (2006) who used the Hursts exponent approach.8
In an empirically robust study, Li (2003a) examined the evolving efciency of the Chinese stock
market. In particular, on applying the Kalman Filter technique to a system consisting of a time-varying
AR model and an asymmetric TGARCH equation, and using daily index-level data for the Shanghai and
Shenzhen stock exchanges over the period May 1992 to January 2001, Li (2003a) found that there has
been a steady movement towards efciency, possibly as a result of greater levels of market liquidity and
a strengthening of, and increase in, regulations. Similarly, in a follow-up paper, Li (2003b) found that
A- and B-shares have exhibited an increasing trend towards efciency, although B-shares appear to
be less efcient than A-shares. Li (2003b) concluded from these results that the A-share markets have

6
The authors also conducted tests of weak-form efciency using different data frequencies and found that daily data were
less efcient than both weekly and monthly data.
7
The authors also found evidence to suggest that the Shenzhen market was more efcient than the Shanghai market.
8
While Laurence et al. (1997) and Cajueiro and Tabak (2006) focused on daily index level data for both the Shanghai and
Shenzhen A- and B-share markets, Wang et al. (2004) employed daily share price data for 244 A-shares and 57 B-shares.
Specically, Laurence et al. (1997) studied daily price data of the Shanghai and Shenzhen A- and B-share indices over the period
March 1997October 1996, Cajueiro and Tabak (2006) examined daily share price data of the Shanghai and Shenzhen A- and
B-share indices over the period June 1992December 2000 and Wang et al. (2004) focused on the daily data of 301 companies
over the period August 1994July 2000.

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S.G.M. Field, J. Jetty / Research in International Business and Finance 22 (2008) 351361

contributed most to the steady convergence of the aggregate Shanghai and Shenzhen stock markets
towards efciency. With regard to the relative efciency of the A- and B-share markets, Li (2003b)
attributed the greater efciency of the A-share market to the greater access to information by domestic
investors as compared to their foreign counterparts.
Overall, it is apparent from this review of the literature that previous empirical studies, which
have investigated the weak-form efciency of the Chinese stock market, have arrived at a mix of
different conclusions using different methods and different datasets. However, a common feature of
most previous studies is that they have tended to employ conventional tests to investigate the weakform efciency of the Chinese stock market. The robustness of these methods has come under attack in
the literature and, consequently, the ability of these results to stand up in the face of an empirically wellspecied methodology is questionable. This paper attempts to overcome the methodological problems
inherent in previous studies by employing a well-specied and powerful procedure to investigate
the relative efciency of the Chinese A- and B-share markets following the regulatory change which
widened ownership of the B-share market to include domestic investors. Such an investigation is vital
as any evidence on weak-form efciency is limited to the extent that it is based on a valid econometric
model.
3. Data and preliminary statistics
Datastream was used to obtain daily nominal share price data for a selection of rms listed on the
Shanghai and Shenzhen stock exchanges over the period 1 January 1996 to 30 April 2005. In particular,
data for 370 companies, which are drawn from all sectors and contain a mix of both A- and B-shares,
were obtained and analysed. The sample consists of 182 A-shares and 35 B-shares from the Shanghai
exchange and 122 A-shares and 31 B-shares from the Shenzhen market. These companies represent
all rms listed on the Chinese markets over the time period studied for which data were available.
Returns for each share were calculated and converted to UK pounds sterling according to the
formula:
Rit = Ln

 P   X 
t1
it
Pit1

Xt

(1)

where Rit is the return on company i for day t, Pit is the price level of this company in the same period,
Xt is the poundRenminbi, poundHong Kong dollar or poundUS dollar exchange rate9 obtained from
Datastream, and Ln is the natural logarithm.
In order to investigate the effects of a change in regulation on the efciency of the Chinese stock
markets, the sample was split into two sub-periods covering the time before and after the regulatory shift in the trading of B-shares on 17 February 2001. This regulatory change permitted domestic
investors to participate in the trading of B-shares, a market which was previously restricted to foreign
investors.
The mean (mean), standard deviation (S.D.), minimum (min), maximum (max), skewness (skew)
and kurtosis (kurt) were calculated for the daily returns of the sample companies across various
time periods, and are reported in Table 1. In addition, the table reports the results from applying
the AndersonDarling (AD) and KolmogorovSmirnov (KS) tests for normality to the return series
of the sample companies. A visual examination of the table shows that the sample companies earned
positive (negative) mean daily returns before (after) the change in regulation. In addition, although
there was no difference in returns between the A- and B-shares over the entire period, the A-shares
recorded higher returns than the B-shares in the pre-period. However, this situation reversed itself
in the post-period when the A-shares recorded lower mean returns than the B-shares. In particular,
the A-shares (B-shares) earned 0.11 percent (0.05%) in the pre-period, and recorded a mean return of
0.12 percent (0.03%) in the post-period.
Table 1 further reveals that B-share returns were more volatile than A-shares in all periods examined. It is also apparent from the table that the volatility of A- and B-share returns decreased in the
9
As already mentioned, A-shares are denominated in Chinese renminbi while B-shares trade in US dollars on the Shanghai
exchange and are denominated in Hong Kong dollars on the Shenzhen exchange.

S.G.M. Field, J. Jetty / Research in International Business and Finance 22 (2008) 351361

355

Table 1
Descriptive statistics for daily returns
Mean

S.D.

Min

Max

Skew

Kurt

AD

KS

A-shares
Whole
Pre
Post

0.0001
0.0011
0.0012

0.0279
0.0314
0.0227

0.1446
0.1371
0.1116

0.1835
0.1829
0.1024

0.3682**
0.6778**
0.3805**

4.3559**
4.0918**
3.6617**

27.2250**
18.9980**
6.5130**

0.0640*
0.0810*
0.0640*

B-shares
Whole
Pre
Post

0.0001
0.0005
0.0003

0.0358
0.0421
0.0258

0.2373
0.2326
0.1233

0.2587
0.2587
0.1056

0.1416**
0.1014*
0.1557**

5.3918**
4.5881**
3.2345**

57.3800**
32.3100**
16.4100**

0.1120*
0.1120*
0.0890*

The table details descriptive statistics for the sample companies for the whole sample period and the pre- and post-regulatory
change periods. Whole refers to the whole sample period and spans the time from 1 January 1996 to 30 April 2005. Pre- denotes
the pre-regulatory change period and covers the time from 1 January to 16 February 2001 and post-refers to the post-regulatory
change period and spans the 17 February 2001 to 30 April 2005 period. S.D., Min and Max denote the standard deviation, the minimum and maximum daily return, respectively. Skew is the KendallStuart measure of skewness, and kurt is the KendallStuart
measure of kurtosis. AD refers to the AndersonDarling test for normality and KS represents the KolmogorovSmirnov test
for normality. An (*) indicates signicance at the 10 percent level while (**) denotes signicance at the 5 percent level.

period following the regulatory change. This nding is conrmed by an analysis of the minimum and
maximum values; the spread between these values is much lower in the post-period than in the preperiod. Surprisingly however, the B-shares experienced a slightly higher level of risk (2.58%) than the
A-shares (2.27%) in the post-period. This nding contradicts Su and Fleisher (1998) and Chiu et al.
(2005) who found that A-shares were more volatile than B-shares. Finally, Table 1 shows that the
returns of A- and B-shares were not normally distributed; the return distributions show signs of skewness and of being strongly leptokurtic. The results for the AD and KS tests of normality support this
nding; using the AD (KS) test, the null hypothesis of normally distributed data was rejected at the 5
(10)% level for both the A- and B-shares in each sample period. These ndings highlight the importance
of using a non-parametric approach and heteroskedasticity-consistent methodology when testing the
efciency of the Chinese stock markets.
The presence of a unit root in the log of the daily price series was tested using the Augmented
DickeyFuller (ADF) and PhillipsPerron (PP) tests; the results from these tests are shown in Table 2.
The second column of the table reports the results when a constant term only is included in the
ADF model as a deterministic regressor while the third and fourth columns show the results when
both a constant term and a time trend are incorporated in the model. In all cases considered, the null
hypothesis that the data series contain a unit root was not rejected at the 1 percent level of signicance.
Thus, Table 2 indicates that there is a unit root in each of the price series and, therefore, that each price
series follows a random walk process. However, the presence of a unit root is a necessary, but not
sufcient, condition for a random walk process (Campbell et al., 1997). It is therefore necessary to
conduct a more denitive test of return predictability.
4. Variance ratio tests
The return behaviour of the sample companies was rst examined using the conventional Lo and
MacKinlay (1988) variance ratio test and then by applying an alternative non-parametric variance ratio
test developed by Wright (2000).10 The Lo and MacKinlay (1988) test assumes that if a data-series
follows a random walk, the variance of its k-differences is k times the variance of its rst difference.
The test also determines if a time series follows a random pattern; an estimated variance ratio of less
than one implies negative serial correlation whilst a ratio of greater than one suggests positive serial
correlation. Therefore, if {yt } denotes a time series consisting of T observations y1 , . . ., yT of asset

10
Wrights (2000) ranks-based variance ratio test has also been used to test the absence of temporal dependence in exchange
rate series (Belaire-Franch and Opong, 2005a), equity indices ((Belaire-Franch and Opong, 2005b) and stock index futures (Smith
and Rogers, 2006).

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S.G.M. Field, J. Jetty / Research in International Business and Finance 22 (2008) 351361

Table 2
Unit root tests of share price series
Augmented DickeyFuller

PhillipsPerron

Constant

Constant + trend

Constant + trend

A-Shares
Whole
Pre
Post

2.278
1.862
0.089

1.414
2.555
2.749

1.457
2.718
2.981

B-Shares
Whole
Pre
Post

1.550
1.467
2.424

1.686
1.658
2.761

1.792
1.617
2.584

The table details the results of the Augmented DickeyFuller (ADF) and Phillips-Perron (PP) unit root tests which were applied
to the log of the daily price series of the sample companies for the whole sample period and the pre- and post-regulatory change
periods. Whole refers to the whole sample period and spans the time from 1 January 1996 to 30 April 2005. Pre-denotes the
pre-regulatory change period and covers the time from 1 January to 16 February 2001 and post-refers to the post-regulatory
change period and spans the 17 February 2001 to 30 April 2005 period. For the Whole period, the Augmented DickeyFuller
critical values for t-statistics at 10, 5 and 1 percent levels for the model with the constant are 2.567, 2.862 and 3.433,
respectively, and for the model including both a constant and time trend (ADF and PP), the critical values are 3.128, 3.412 and
3.962, respectively. For the pre-period, the Augmented DickeyFuller critical values for t-statistics at 10, 5 and 1 percent levels
for the model with the constant are 2.568, 2.863 and 3.435, respectively, and for the model including both a constant and
time trend (ADF and PP), the critical values are 3.129, 3.413 and 3.965, respectively. For the post-period, the Augmented
DickeyFuller critical values for t-statistics at 10, 5 and 1 percent levels for the model with the constant are 2.568, 2.864 and
3.436, respectively, and for the model including both a constant and time trend (ADF and PP), the critical values are 3.129,
3.414 and 3.966, respectively.

returns, then the variance ratio of the k-th difference is dened as

VR (k) =

 2 (k)
 2 (1)

(2)

where  2 (k) is the unbiased estimator of 1/k of the variance of each individual data-series k-th difference under the null hypothesis,  2 (1) is the variance of the rst-differenced data-series and k is the
number of days of the difference interval. In order to facilitate a comparison with previous studies,
such as Darrat and Zhong (2000) and Ma and Barnes (2001), k = 2, 4, 8, 12 and 16 for all the variance
ratio tests conducted. Test statistics for the variance ratios under the assumptions of homoscedasticity
[M1 ] and heteroscedasticity [M2 ] were then calculated to determine the frequency at which the Zstatistics were signicant at the 5 percent level across the individual rms (where the null hypothesis
is no autocorrelation). The test statistics were computed as
M1 (k) =

VR(k) 1

(3)

1/2

(k)

which, under the assumption of homoscedasticity, is asymptotically distributed as N(0,1), where the
asymptotic (k) is given by
 (k) =

2(2k 1)(k 1)
3kT

(4)

and
M2 (k) =

VR(k) 1

(5)

1/2

 (k)

which is robust under heteroscedasticity and asymptotically distributed as N(0,1), where

 (k) =

k1 


2(k j)
j=1

(j)

(6)

S.G.M. Field, J. Jetty / Research in International Business and Finance 22 (2008) 351361

and

T

t=j+1

(j) =

(yt )
(ytj )



T
(y
t=1 t

)

357

2

(7)

and
1
yt
k
T


=

(8)

t=1

In addition, the non-parametric variance ratio test using ranks, as developed by Wright (2000),
was utilised to further test the efciency of the Chinese stock markets. This test substitutes ranks of
differences in place of the differences in the Lo and MacKinlay (1988) tests. According to Wright (2000),
these tests are more powerful than the conventional tests suggested by Lo and MacKinlay (1988) and
are more appropriate when the returns data are not normally distributed. The test statistics based on
ranks (R1 and R2 ) were computed as follows:

1/Tk

R1 =
and

(r + + r1tk+1 )2
t=k 1t
1/T


R2 =

T

1/Tk

T
t=k

T

r2
t=1 1t

(r2t + + r2tk+1 )2

1/T

T

r2
t=1 2t

1/2

(k)

(9)

1/2

(k)

(10)

where
r1t =

(r(yt (T + 1)/2))

(T 1)(T + 1)/12

and
r2t = 1

 r(y ) 
t
(T + 1)

(11)

(12)

(k) is dened in Eq. (4), r(yt ) is the rank of yt among y1 , . . ., yT , and 1 is the inverse of the standard
normal cumulative distribution function.
The total number of signicant p-values (at the 5 percent level) was then calculated in order to
determine the propensity for rejecting the null hypothesis that the series follow a random walk. These
rates of rejection were analysed in each sub-period and for the two classes of share.
5. Results and analysis
Table 3 reports the results from applying the conventional variance ratio tests developed by Lo and
MacKinlay (1988) to the return series of the 370 companies included in the study. The results for M1
for the whole period indicate that the B-shares have a higher rate of rejection of the null hypothesis of
random walk behaviour as compared to the A-shares. In addition, the M1 results show that the rates of
rejection generally decreased for both classes of share after the change in regulation in 2001; with the
exception of two cases for the A-shares (when k = 2 and 12) and two cases for the B-shares (when k = 12
and 16), the rates of rejection all decreased for both the A- and B-shares. However, the M1 measure
assumes homoskedasticity; any rejection of the null hypothesis that the price series follow a random
walk could therefore be due to heteroskedasticity. This possibility can be examined by inspecting the
M2 measure which reports the heteroskedastic consistent variance ratio test results. These results
show fewer rejections of the null hypothesis for both A- and B-shares suggesting that, for some rms,
the null hypothesis of random walk behaviour is not robust to heteroskedasticity. However, for other
rms, the variance ratio is different from the expected value of 1 due to autocorrelations rather than to

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S.G.M. Field, J. Jetty / Research in International Business and Finance 22 (2008) 351361

Table 3
Summary of conventional variance ratio test results
M2

M1
k=2

k=4

k=8

k = 12

k = 16

k=2

k=4

k=8

k = 12

k = 16

A-shares (n = 304)
Whole
Freq
87
Percent
28.6

92
30.3

85
28.0

75
24.7

67
22.0

31
10.2

38
12.5

41
13.5

33
10.9

34
11.2

Pre
Freq
Percent

60
19.7

61
20.1

57
18.8

46
15.1

48
15.8

17
5.6

21
6.9

26
8.6

18
5.9

16
5.3

Post
Freq
Percent

84
27.6

60
19.7

50
16.4

52
17.1

44
14.5

44
14.5

39
12.8

35
11.5

30
9.9

26
8.6

B-shares (n = 66)
Whole
Freq
42
Percent
63.6

47
71.2

46
69.7

44
66.7

39
59.1

38
57.6

34
51.5

33
50.0

32
48.5

23
34.8

Pre
Freq
Percent

41
62.1

43
65.2

40
60.6

39
59.1

33
50.0

32
48.5

30
45.5

29
43.9

27
40.9

22
33.3

Post
Freq
Percent

27
40.9

28
42.4

38
57.6

40
60.6

38
57.6

19
28.8

19
28.8

30
45.5

31
47.0

31
47.0

The table shows the rejection rates in numbers (freq) and percentage terms (Percent) of the null hypothesis of no autocorrelation
at the 5 percent signicance level. M1 and M2 represent the conventional variance ratio test statistics; M1 assumes homoscedasticity while M2 assumes heteroscedasticity. The Whole period spans the entire sample period 1 January 1996 to 30 April 2005,
while the pre-and post-periods span the periods before and after the change in regulation on 17 February 2001. In particular,
the pre-period spans the time from 1 January 1996 to 16 February 2001 while the post-period covers the time from 17 February
2001 to 30 April 2005.

heteroskedasticity. A similar result is obtained on comparing the periods before and after the regulatory
change; for all values of q, there are fewer rejections for A- and B-shares in both the pre- and postperiods. Overall, the M1 and M2 results are consistent in their suggestion that the B-share market is
less efcient than its A-share counterpart. However, the results for M2 portray a markedly different
picture from the M1 results when considering the impact of the regulatory change on the efciency
of the Chinese stock markets. In particular, the results suggest increasing inefciency as the rates of
rejection in the post-period are higher than in the pre-period.11
Given the potential problems that may arise when applying the conventional Lo and MacKinlay
(1988) variance ratio tests to non-normal data, the random walk hypothesis was also tested using
the ranks of differences as developed by Wright (2000). Wright (2000) demonstrates that his nonparametric ranks-based variance ratio test is exact and may be more powerful than the conventional
variance ratio test when the data are non-normal. The results from applying this non-parametric test
to the data series are reported in Table 4. It is apparent from the table that the B-shares have higher

11
Similar ndings to the M1 test results for the whole period were obtained from a test of serial correlations. In particular,
the results from a test of serial correlations for lags 1, 2 3, 4, 5, 10 and 15 for the whole test period indicated that the B-shares
exhibited a greater level of predictability as compared to their A-share counterparts; the rates of rejection for the null hypothesis
of no autocorrelation were 80.3 percent and 60.9 percent, respectively. However, for the pre and post periods, the results from
the serial correlation test results were more in keeping with the M2 variance ratio test results. Specically, the serial correlation
test results indicated a signicant increase in the efciency of the A-share market following the regulatory change; the rejection
rate decreased from 55.9 percent to 21.4 percent. By contrast, the serial correlation test results indicated that there was no
signicant difference in the efciency of the B-share market following the change in regulation; the rate of rejection of the null
hypothesis of no autocorrelation remained static at 63.6 percent. More detailed results from the tests of serial correlations are
available from the authors on request.

S.G.M. Field, J. Jetty / Research in International Business and Finance 22 (2008) 351361

359

Table 4
Summary of ranks-based variance ratio test results
R2

R1
k=2

k=4

k=8

k = 12

k = 16

k=2

k=4

k=8

k = 12

k = 16

A-shares (n = 304)
Whole
Freq
94
Percent
30.9

102
33.6

87
28.6

93
30.6

72
23.7

65
21.4

75
24.7

67
22.0

70
23.0

67
22.0

Pre
Freq
Percent

91
29.9

93
30.6

62
20.4

78
25.7

65
21.4

66
21.7

46
15.1

37
12.2

52
17.1

46
15.1

Post
Freq
Percent

35
11.5

43
14.1

63
20.7

53
17.4

39
12.8

47
15.5

52
17.1

57
18.8

55
18.1

43
14.1

B-shares (n = 66)
Whole
Freq
35
Percent
53.0

28
42.4

25
37.9

18
27.3

16
24.2

39
59.1

35
53.0

35
53.0

35
53.0

27
40.9

Pre
Freq
Percent

27
40.9

29
43.9

22
33.3

13
19.7

9
13.6

37
56.1

35
53.0

33
50.0

27
40.9

20
30.3

Post
Freq
Percent

20
30.3

17
25.8

10
15.2

11
16.7

11
16.7

21
31.8

16
24.2

22
33.3

25
37.9

23
34.8

The table shows the rejection rates in numbers (freq) and percentage terms (Percent) of the null hypothesis of no autocorrelation at the 5 percent signicance level. R1 and R2 represent the variance ratio test statistics based on ranks; R1 assumes
homoscedasticity while R2 assumes heteroscedasticity. The whole period spans the entire sample period 1 January 1996 to 30
April 2005, while the pre-and post-periods span the periods before and after the change in regulation on 17 February 2001. In
particular, the pre-period spans the time from 1 January 1996 to 16 February 2001 while the post-period covers the time from
17 February 2001 to 30 April 2005.

rates of rejection of the null hypothesis of no autocorrelation as compared to the A-shares for the
whole sample period. This result is in line with the ndings of Laurence et al. (1997), Su and Fleisher
(1998), Wang et al. (2004) and Cajueiro and Tabak (2006) and suggests that the B-share market is less
efcient than the A-share market. One possible explanation for the greater inefciency of the B-share
market is information asymmetry. In particular, foreign investors in the B-share market may have an
information disadvantage relative to domestic investors trading A-shares due to language barriers,
different accounting standards and the lack of reliable information about local rms (Chakravarty et
al., 1998).12
The table also reveals that there were signicant changes in the level of efciency before and after
the change in regulation for both classes of shares. In particular, the table shows that the rates of
rejection for the A-shares generally decreased after 2001, while there was a large decrease in the rates
of rejection for the B-shares. One possible explanation for the contradictory results obtained from the
parametric and non-parametric tests could be due to the non-normality of the returns data. However,
it is worth noting that Wrights (2000) alternative variance ratio test was developed to overcome

12
The empirical evidence appears to be mixed regarding the information asymmetry between local and foreign investors in the
Chinese stock markets. For example, some studies document evidence suggesting that local investors are better informed than
and Tang, 2001; Chan et al., 2006), while other commentators have found
foreign investors (Chakravarty et al., 1998; Bergstrom
evidence to suggest that foreign investors enjoy an informational advantage relative to domestic investors (Chui and Kwok,
1998; Chen et al., 2001; Yang, 2003). An alternative nding is that information diffusion between A- and B-shares depends on
the stock exchange. In particular, Sjo o and Zhang (2000) argue that foreign investors drive the prices of A-shares in the larger
and more liquid Shanghai exchange because of the inferior information of domestic investors. However, they argue that, in the
smaller Shenzhen stock exchange, foreign investors affect returns only in the short-run while, in the long-run, information ows
from domestic to foreign investors.

360

S.G.M. Field, J. Jetty / Research in International Business and Finance 22 (2008) 351361

the problems with using non-normal data and, as such, it provides a better picture of the level of
serial dependency within the data series. On that note, the results from this analysis indicate that the
efciency of both A- and B-share markets has increased over time; Table 4 shows that both markets
experienced improved levels of efciency in the second sub-period. This increase in efciency may be
explained by the series of reforms that the Chinese government has embarked on in recent years in an
attempt to improve the operation of the nancial markets (Seddighi and Nian, 2004). It seems likely
that the promulgation and enforcement of regulations and laws regarding the management of the
markets, informational transparency and information transmission have positively impacted Chinese
stock market efciency. In this respect, much of the improvement in the pricing efciency of the Bshare market may be attributable to the widening of participation to include domestic investors. Such a
regulatory change may have reduced the information disadvantage of foreign investors and facilitated
a more rapid diffusion of information amongst them. The regulatory change may also have resulted in
the informed (domestic) investors becoming the major participants in the B-share market.13
Finally, Tables 3 and 4 show that as k increases, the rates of rejection of the null hypothesis of no
autocorrelation decreases for both A- and B-shares. Exceptions to this generalisation are the M1 and
M2 results for the B-shares where there is an increase in the rate of rejection of the null hypothesis as
k increases. Notwithstanding these exceptions, the results indicate no pattern in returns over longer
periods.
6. Conclusion
This paper has examined the weak-form efciency of the Chinese stock markets. In particular, using
daily company-level data and employing an empirically robust, recently developed non-parametric
variance ratio test, the paper has provided new evidence on the relative efciency of the Chinese Aand B-share markets. In so doing, the paper overcomes the methodological weaknesses of previous
papers in the area which have tended to rely on the use of conventional test procedures, such as serial
correlation tests, to investigate weak-form efciency. In addition, the paper investigated the impact
on Chinese stock market efciency following the regulatory change that widened the B-share market
to include domestic investors.
A number of interesting ndings emerged from the analysis. First, preliminary statistics indicated
that the returns earned by Chinese companies were highly volatile, heavily skewed and strongly leptokurtic. These features necessitated the use of a robust methodology. Second, the results showed
that the A-share market is generally more weak-form efcient than the B-share market, although the
efciency of both markets has improved over time. The results also suggest that the relaxation of
restrictions on domestic investor participation in the B-share market has had a positive impact on
pricing efciency in the B-share market; this regulatory change appears to have reduced the information disadvantage of foreign investors and increased the speed with which information is diffused
amongst them. Future research will determine if the information diffusion between the Chinese Aand B-share markets changes as the markets evolve further. Finally, the results suggest that any ndings on efciency depend on the method of analysis employed as, in some cases, there were marked
differences in the results obtained from using the parametric and non-parametric testing procedures.
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