A Study On The Recognition And The Proceeding Mechanism Of The Bubble In Chinese Stock Market

After 4 years'bear market, Chinese stock market experienced a bull market from 2005. Shanghai Composite Index skyrocketed by 500% from 1000 to 6124. Were there bubbles behind the bull market? If the answer is yes, then how did the stock market bubble proceed? The thesis is aimed to answer these two questions.The thesis begins by introducing the definition of the stock market bubble, making clear the purpose of the thesis and having a review of the research on stock market bubbles conducted by both Chinese and foreign researchers. Then two empirical studies, namely duration dependence model and rational P/E model, are conducted to test whether there were bubbles in our stock market during the last two years'period. The duration dependence model was first proposed by McQueen and Thorley (1994) and the thesis made some adjustments on the model in application. The thesis also improved the theoretical derivation of the rational P/E model starting from the discounted dividend model. The results from the two studies are more or less the same. The studies show that the bubbles in our stock market arose at the end of 2006 or at the early 2007. In addition, by examining the P/E, P/B and market turnover from both Chinese market and foreign markets, there have been evident signals indicating the bubbles in Chinese stock market.After identifying the bubble in our stock market, the thesis makes a thorough analysis on the proceeding mechanism of the bubble. In macro terms, three factors including the appreciation of RMB enabled the initial rise of our stock market and helped the formation of the feedback loophole M. Due to the self-acceleration of the feedback loophole and the great changes in Chinese and the world economic and financial conditions at the beginning of 2007, the feedback loophole M was transformed to M'and the continuing surge of the stock price in Chinese stock market could not be supported by the macro economy and was only a reflection of the investors'emotions and the stock market's internal feedback. The stock market bubble in China was gradually formed and inflated during this process. In micro terms, the unique population and social characteristics in China and the problems in our stock market are also important factors that drove our stock market to form bubbles. Specifically, these factors include the special age structure of Chinese investors, the new times feeling, the agent problem of our institutional investors, the information asymmetry, the excessive regulatory interference, the lack of arbitrage mechanism, etc.Finally, the thesis makes a research on the characteristics of different structures in the bubble period based on industry and market cap. It showed that cyclical industries such as finance and real estate had a higher percentage price rise than the other industries and the lower the P/E of an industry at the beginning, the more the price of an industry rose subsequently. In addition, although there was no significant difference in the amount of the percentage price rise in different cap stocks, stocks of different caps did perform differently in different stages of the stock market bubble period.