Validity Of The Chinese Futures Market Based On The Fractal Market Hypothesis

An effective futures market has the function of finding price and controlling risk. The prices of different futures can reflect the supply and demand of the cash market. They can reflect the futures equilibrium cash prices. With the development of futures market in our country, the investors can use futures contracts to avoid risk in order to keep their assets value. Therefore, more and more investors care about the efficiency of the futures market.The methodology of efficiency test begins with the test of weak form efficiency. If the market is efficient, there is no room to make risk premium according to the past information. There are many ways to carry out such tests, and the most popular one in early papers is Random Walk Model. But some scholars have discovered that the prices of financial assets do not totally walk randomly, and many of them have a fat-tailed or leptokurtic distribution. To solve this problem, they began to explain and analyze behaviors of capital market using nonlinear theory, and obtained some outcomes. Because it can describe various phenomena of capital market, it received recognition. Fractal market theory is one representative theory of nonlinear theory.This paper is based on fractal market hypothesis. Beginning with basic test of weak form efficiency, the paper investigates Hurst Exponent of Dalian Commodity Exchange' s soybean contracts, Shanghai Futures Exchange' s copper and aluminum contracts, Zhengzhou Commodity Exchange' s wheat and cotton contracts. We find that it exhibits the features of fractal. We prove that Chinese futures market lacks efficiency.In this paper, we first analyze EMH and its limitations, and introduce fractal market theory and its analytical methods. Then, this paper tests Chinese futures market by using general indices of five futures contracts and typical method of fractal market theory. And it calculates the length of acyclic cycle of the futures contracts. Finally, we analyze the causes of inefficiency of our futures market. This paper serves as a reference for the government policy and investment decision-making.