A tale of two indexes: predicting equity market downturns in China

Sebastien Lleo and William Ziemba

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: Predicting stock market crashes is a focus of interest for both researchers and practitioners. Several prediction models have been developed, mostly for use on mature financial markets. In this paper, we investigate whether traditional crash predictors, the price-to earnings ratio, the Cyclically Adjusted Price-to-Earnings ratio and the Bond-Stock Earnings Yield Differential model, predict crashes for the Shanghai Stock Exchange Composite Index and the Shenzhen Stock Exchange Composite Index. We also constructed active investment strategies based on these predictors. We found that these crash predictors have predictive power and the active strategies delivered lower risk and higher risk-adjusted return than a simple buy and hold investment.

Keywords: stock market crashes; Shanghai Stock Exchange; Shenzhen stock exchange; Bond-Stock Earnings Yield Differential (BSEYD); price earnings-ratio; Cyclically-Adjusted Price Earnings ratio (CAPE) (search for similar items in EconPapers)
JEL-codes: G10 G12 G14 G15 (search for similar items in EconPapers)
Pages: 63 pages
Date: 2018-09-01
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http://eprints.lse.ac.uk/118923/ Open access version. (application/pdf)

Related works:
Working Paper: A tale of two indexes: predicting equity market downturns in China (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:118923

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