The Research On Our GEM Stock Market Bubbles Measure

Since stock market is officially open and trading on October,30th,2009, theGrowth Enterprise Market (GEM) of China eases the pressure of financing forhigh-tech and high growth enterprises, changes the financial conditions of small andmedium-sized enterprises, promotes the adjustment of structures for new industries,improves the innovative efficiency of the whole society, and creates the new directionof the investment for capital market. Therefore, GEM market is of great significancefor the transformation of the mode of economic growth, perfection of multi-levelcapital system, and enrichment of capital market structure.However, there are many problems in the development of GEM. Althoughpredicaments such as high prices, high P/E ratio, high whip round, and other problemslikewise “three highs” phenomenon are solved to some extent, yet the emergence ofbubbles affects the normal operation of the economy, the safety of financial systemand the distribution of wealth and investment decisions, and the interests of investors.Therefore, it is of great importance to estimate the bubbles of the GEM of China, toprevent and dissolve the risk of stock market in time, to ensure the healthydevelopment of small and medium-sized enterprises, and to guarantee sustainableeconomic growth.Main contents of this research are as follows:Firstly, this paper combs the theoretical origins of stock market bubble, analysesthe concept of bubbles and the concept of stock market bubble, the characteristic ofthe stock market bubble, and theoretically articulates the mathematical model ofrational foam and irrational foam model. On the basis of the above analysis, this paperfurther analyses the features of the Growth Enterprise Market (GEM) of China,summarised the reasons of the stock market bubble, as well as analyse the positiveand negative effects of bubbles appeared in GEM.Secondly, this paper investigates the degree of stock market bubble of GEM viathe analysis of the indicators in terms of P/E ratio, P/B ratio, foam degrees and foam coefficient; compares the monthly P/E ratio and the P/E ratio of second board stockmarket; analyses the bubble degree of GEM via P/B ratio, further explores the trendof stock market bubble in GEM through the calculation of bubble degrees and foamcoefficient, and sums up the outcomes of the indicators measured.Moreover, this paper estimates expected rate of return of investors throughCAPM model and estimates investment payoff period through Gordon model, basedon which further measures the reasonable P/E ratio and stock market bubble degreethrough Residual Income Valuation Model. Based on theoretical researches, this paperformulates theoretical upper and lower limit of the proper P/E ratios and analyse theempirical results, so as to make it clear the reasonable fluctuation range of the P/Eration of GEM.Finally, this paper provides recommendations for the reduction of stock marketbubbles in GEM, from the perspectives of traded companies, investors, and marketmonitoring and regulations.Innovative suggestions of this paper are as follows:Firstly, this paper compares the P/E ratio of Chinese GEM with the P/E ratio ofNASDAQ (the USA), OTC (Taiwan), KOSDAQ (Korea), and GEM of Hong Kong.This paper also calculates the bubble degrees and foam coefficients quarterly toarticulate the bubble degree of GEM more specifically and clearly.Secondly, based on the calculation of beta according to the results of Shanghaiindex and Shenzhen composite index, with the consideration of risk premium factors,this paper estimates investors’ expected rate of return through capital asset pricingmodel (CAPM), estimates the expected investment payoff period through themathematical expression of the Gordon model. This paper also estimates the bubblesof GEM via the Residual Income Valuation Model to make the measured results moreeffective and believable.