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Booms and busts in China's stock market: Estimates based on fundamentals

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  • de Bondt, Gabe
  • Peltonen, Tuomas A.
  • Santabárbara, Daniel

Abstract

This paper empirically models China’s stock prices using conventional fundamentals: corporate earnings, risk-free interest rate, and a proxy for equity risk premium. It uses the estimated longrun stock price misalignments to date booms and busts, and analyses equity market reforms and excess liquidity as potential drivers of these stock price misalignments. Our results show that China’s equity prices can be reasonable well modelled using fundamentals, but that various booms and busts can be identified. Policy actions, either taking the form of deposit rate changes, equity market reforms or excess liquidity, seem to have significantly contributed to these misalignments. JEL Classification: G12, G18

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 1190.

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Date of creation: May 2010
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Handle: RePEc:ecb:ecbwps:20101190

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Keywords: China; Equity market; liquidity; reforms; Stock price;

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Cited by:
  1. Lin, Xiaoqiang & Fei, Fangyu, 2013. "Long memory revisit in Chinese stock markets: Based on GARCH-class models and multiscale analysis," Economic Modelling, Elsevier, vol. 31(C), pages 265-275.
  2. Girardin, Eric & Joyeux, Roselyne, 2013. "Macro fundamentals as a source of stock market volatility in China: A GARCH-MIDAS approach," Economic Modelling, Elsevier, vol. 34(C), pages 59-68.

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