A Tale of Two Indexes: Predicting Equity Market Downturns in China

71 Pages Posted: 5 Dec 2015 Last revised: 18 Dec 2020

See all articles by Sebastien Lleo

Sebastien Lleo

NEOMA Business School

William T. Ziemba

University of British Columbia (UBC) - Sauder School of Business; Systemic Risk Centre - LSE

Date Written: December 5, 2020

Abstract

Equity correction and crash prediction models were predominantly developed in mature financial markets. Do these models work in developing markets? This paper investigates the application of three families of fundamental models, the Price-to-Earnings ratio, Cyclically Adjusted Price-to-Earnings ratio, and Bond-Stock Earnings Yield Differential model, to mainland China's Shanghai and Shenzhen stock exchanges. We identify differences in market behavior and find that these models are significant predictors. We also show that these models can contribute to active management strategies that outperform a buy-and-hold investment, highlighting their real-world relevance.

Keywords: stock market corrections and crashes, Shanghai Stock Exchange, Shenzhen Stock Exchange, Bond-Stock Earnings Yield Differential (BSEYD), Price-to-Earnings ratio, Cyclically-Adjusted Price Earnings ratio (CAPE).

JEL Classification: G14, G15, G12, G10

Suggested Citation

Lleo, Sebastien and Ziemba, William T., A Tale of Two Indexes: Predicting Equity Market Downturns in China (December 5, 2020). Available at SSRN: https://ssrn.com/abstract=2698422 or http://dx.doi.org/10.2139/ssrn.2698422

Sebastien Lleo (Contact Author)

NEOMA Business School ( email )

Reims
France

William T. Ziemba

University of British Columbia (UBC) - Sauder School of Business ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada
604-261-1343 (Phone)
604-263-9572 (Fax)

HOME PAGE: http://williamtziemba.com

Systemic Risk Centre - LSE ( email )

Houghton St, London WC2A 2AE, United Kingdom

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