Antibubble and Prediction of China's stock market and Real-Estate

TL;DR

This paper identifies a log-periodic power-law antibubble in China's stock market starting in 2001, linked to a real-estate bubble, with predictions of market recovery and analysis of herding behavior.

Contribution

It provides the first detailed characterization of China's stock market antibubble and links it to the real-estate bubble, with predictive insights and analysis of herding effects.

Findings

Antibubble characterized by stable parameters from 2002 to 2003.

Predicted stock market rebound by end of 2003 with at least 25% increase.

Strong herding effects observed, possibly due to market immaturity.

Abstract

We document a well-developed log-periodic power-law antibubble in China's stock market, which started in August 2001. We argue that the current stock market antibubble is sustained by a contemporary active unsustainable real-estate bubble in China. The characteristic parameters of the antibubble have exhibited remarkable stability over one year (Oct. 2002-Oct. 2003). Many tests, including predictability over different horizons and time periods, confirm the high significance of the antibubble detection. We predict that the Chinese stock market will stop its negative trend around the end of 2003 and start going up, appreciating by at least 25% in the following 6 months. Notwithstanding the immature nature of the Chinese equity market and the strong influence of government policy, we have found maybe even stronger imprints of herding than in other mature markets. This is maybe due indeed to the immaturity of the Chinese market which seems to attract short-term investors more interested in fast gains than in long-term investments, thus promoting speculative herding.