Risk Measure and Early-Warning System of China's Stock Market Based on Price-Earnings Ratio and Price-to-Book Ratio

Abstract EN

Based on the actual situation of China's stock market, this paper proposes a method for measuring the stock market's risk and early-warning methods which are based on price-to-earnings ratio and price-to-book ratio.

The study found that the method of VaR can capture the bigger daily drops in a period, and if the drop is at the periodical top of the index, the probability of a sharp index decline will be very high.

It also confirmed that the method is feasible and practical for people to use.

In the long run, this method really can send early-warning signals of sharp decline; the warning levels increase as the index rises.

The study also found that index will not fall after every warning but will continue going forward because of inertia, particularly during a big trend.