Time-varying return predictability in the Chinese stock market

TL;DR

This paper investigates how return predictability in the Chinese stock market changes over time, especially during market turmoils, using advanced statistical tests, supporting the Adaptive Markets Hypothesis.

Contribution

It introduces a dynamic analysis of return predictability in China’s stock market employing the wild bootstrap variance ratio and spectral tests, revealing time-varying patterns.

Findings

Return predictability varies over time.

Significant predictability occurs during market turmoils.

Results support the Adaptive Markets Hypothesis.

Abstract

China's stock market is the largest emerging market all over the world. It is widely accepted that the Chinese stock market is far from efficiency and it possesses possible linear and nonlinear dependence. 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 significant return predictability is observed around market turmoils. Our findings are consistent with the Adaptive Markets Hypothesis and have practical implications for market participants.