Given that the efficiency of the Chinese stock markets was empirically examined in extant literature using statistical tests that are designed to uncover linear correlations of price changes, the obtained statistical inferences of efficiency/inefficiency are on very shaky grounds as highlighted in a recent article by Saadi et al. (2006). Motivated by this concern, the present article re-examines the efficiency of the A- and B-shares markets in Shanghai and Shenzhen Stock Exchanges (SHSE and SZSE) using a battery of nonlinearity tests. The empirical investigation reveals strong evidence of nonlinear serial dependence in the underlying returns generating processes for all indices even after removing linear serial correlations from the data, hence, contradicting the unpredictable criterion of weak-form efficient market hypothesis. Theoretically, these results are not surprising given the fact that investors in the Chinese stock markets trade like noise traders, who purely speculate and treat the market like a casino.
Market efficiency; Return predictability; Nonlinearity; China; Stock market