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

Lleo, Sebastien and Ziemba, William (2018) A tale of two indexes: predicting equity market downturns in China. Systemic Risk Centre Discussion Papers (82). Systemic Risk Centre, The London School of Economics and Political Science, London, UK.

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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.

Item Type:	Monograph (Discussion Paper)
Official URL:	https://www.systemicrisk.ac.uk/
Additional Information:	© 2018 The Authors
Divisions:	Systemic Risk Centre
Subjects:	H Social Sciences > HC Economic History and Conditions H Social Sciences > HG Finance
JEL classification:	G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency; Event Studies G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates G - Financial Economics > G1 - General Financial Markets > G10 - General
Date Deposited:	31 May 2023 11:00
Last Modified:	11 Dec 2024 19:45
URI:	http://eprints.lse.ac.uk/id/eprint/118923

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