The Comparative Research Of Capital Market Efficiency Home And Abroad Based On Information Entropy

The efficient market hypothesis is one of the core issues of modern finance which has extensive applications. It is the foundation of many pricing models and investment decisions. Domestic and foreign scholars have carried out extensive researches on this issue. The purpose of this paper is to test the efficiency of the Shanghai Composite index, the Shenzhen Component Index and the Dow Jones industrial average. Through comparing the efficiency of domestic and international capital markets, we can find the weakness of domestic capital markets.Firstly, this paper introduces the theory of information entropy and the efficient market hypothesis. It also summarizes the methods which are commonly used to test the efficiency of capital market home and abroad. Then it uses the method of Random Walk Test to test the efficiency of three capital markets. The result shows that the three capital markets have not reach the weak-form efficiency.The traditional methods always divide the capital market efficiency into three stages, but can't compare the capital market efficiency from the same stage. Information entropy is the best measurement of uncertainty, so it can compares the efficiency of three capital markets quantitatively. The calculation result of information entropy shows that the effectiveness of the Dow Jones industrial average is higher than domestic markets. Based on the theory of maximum entropy, a probability distribution was educed under the theory of efficient market hypothesis, which testifies that normal distribution is the probability distribution of efficient market. The empirical results show that the profitability distribution of three markets are not normal distribution, but the Dow Jones industrial average's distribution is more closer to the normal distribution. This paper also uses the information entropy to study the risk and relativity of three markets. The results show that the Dow Jones Industrial Index's risk is higher than the other two markets, and has more relativity with domestic markets.Finally, this paper summarizes the advantages of information entropy compared with other methods, which shows that using information entropy to study the efficiency of capital markets is feasible.