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

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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, predicts crashes for the Shanghai Stock Exchange Composite Index and the Shenzhen Stock Exchange Composite Index.

Author(s):

Sébastien Lleo    
NEOMA Business School
France

William Ziemba    
University of British Columbia
Canada