An Empirical Study On Stock Market Bubble Measurement Model Based On Financial Valuation

The essence of the stock market bubble is the part of the stock price that exceeds its intrinsic value(or basic value).Historical experience shows that once the stock market bubble generated by speculative trading bursts,it may cause widespread and far-reaching harm to a country's securities market and even the overall economy.Scientific and reasonable measurement of bubble is the basis and starting point for exploring the its formation mechanism,controlling its size,and reducing the adverse effects it may caused,therefore has an sufficient practical significance.Existing bubble measurement methods mainly include indirect method and direct method.Indirect measurement method can only test the existence of bubble,but cannot measure its specific size.The direct measure method needs to calculate the intrinsic value first,and then calculate the size of the bubble by comparing with the stock price.The problem is that the intrinsic value estimation method used may be insufficient: the most commonly used dividend discount model(DDM)and the residual income model(RIM)all require subjective assumptions about the dividend and income distribution in a certain period of time in the future,so that the bubble may not be accurate.Therefore,finding a new and reliable bubble measurement methods also has certain theoretical significance.This paper measures the size of bubble by follows steps.First,use an intrinsic value valuation model based on financial valuation that is initiated by domestic scholars to estimate the intrinsic value of stock.Then compare the stock price with the intrinsic value to formulate a bubble measure index(BMI),Finally use the bubble measure index to conduct a quantitative analysis.In order to test the validity of the financial valuation model this paper used,an empirical test is required.Stock price is based on Intrinsic value,and liquidity is the direct driver of rising or falling of stock prices.Theoretical analysis indicates that the change of Intrinsic value and liquidity have a positive correlation with stock price changes.This paper takes the A-share listed companies in Shanghai and Shenzhen stock markets as the main sample from 2012 to 2017,and uses the intrinsic value index constructed based on the financial valuation model and the liquidity index based on the balance of securities transaction settlement funds to return the logarithm of the P/B ratio.The regression results suggest that the coefficients of the two variables are significantly positive,and the goodness of fit reached up to 70%,This results remain unchanged using different samples.Theoretical hypothesis are proved,suggesting that the financial valuation model is valid to a certain extent.Meanwhile the regression results suggest the approximate range of discounted period(n)is about 5.8 years,which can be plugged into the financial valuation model to calculate the intrinsic value of each unit of net assets.Compare the intrinsic value with the P/B ratio and construct a bubble measure index(BMI=P/B ratio/intrinsic value)to measure the size of the bubble.When BMI is greater than 1,there is a bubble in the market;when it is equal to or less than 1,there is no bubble.The measurement result shows that the Chinese A-share market has experienced four distinct bubble cycles between 1996 and 2018.As of the end of 2018,the market pricing of capital is pretty close to its intrinsic value.Bubbles in China's A-share market has basically disappeared.