A Study On The Supply Approach Test Of Rational Bubbles Of A-share Market

Does the long-term high price-to-book ratio in the A-share market mean that there is a rational bubble? We propose a method which can directly test bubble from supply approach.Firstly,according to the investment Euler equation,the marginal cost inferred from company's current investment rate is equivalent to the marginal market value which links to market value and thus we can obtain market value based on company's current investment rate.Secondly,we estimate model-based average q which represents fundamental value and calculate actual average q which represents actual value of an enterprise.Thirdly,we judge whether there is a bubble by testing whether the difference between estimated average q and actual average q is significantly equal to zero.We use this method to test the whole A-share market and 25 industries from 1998 to 2016.The empirical results show that there is no rational bubble in China's A-share market except the period from 2014 to 2015 with a positive rational bubble.In 25 industries,only 6 industries have positive rational bubbles.From the logic of our direct test on rational bubbles based on supply approach,we think the reason for the no bubbles in the whole A-share market is that the whole investment rate of listed company is too high.In the background of rapid growth of domestic economy,the company increase investment due to the expect of high return of investment which leads to high adjustment cost and further raise marginal cost.Policy implications and investment suggestions of our research are as follows: the regulator and investor can monitor the bubble risk in the basis of the change of investment rate of listed company in A-share market instead of concluding overvalue or undervalue of the stock market by simply comparing commom relative valuation indicator like PE or PB ratio with other main economies.