Are Chinese stock markets efficient? A cointegration and causality analysis

Established in December 1990 and July 1991 respectively, the Shanghai and Shenzhen Stock Exchanges are the only two official stock markets in China. This paper aims to test for randomness in each stock exchange share price index, and to examine the relationship between the two share price indexes. Statistical evidence shows that both the Shanghai and Shenzhen indexes can be best characterized as random walk processes and therefore the markets are efficient individually. However, the Engle-Granger two-stage cointegration analysis and the Johansen procedure suggest a long-run equilibrium relationship between the two stock prices, while the Granger causality test indicates a feedback relationship between the returns of the Shenzhen and Shanghai shares. These results imply that the stock markets are collectively inefficient.