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Mathematical Problems in Engineering
Volume 2014 (2014), Article ID 612758, 8 pages
http://dx.doi.org/10.1155/2014/612758
Research Article

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

1School of Finance, Zhejiang University of Finance and Economics, Hangzhou 310018, China
2Coordinated Innovation Centre of Wealth Management and Quantitative Investment, Zhejiang University of Finance and Economics, Hangzhou 310018, China
3Center for Research of Regulation and Policy of Zhejiang, Hangzhou 310018, China
4New York Branch, Industrial and Commercial Bank of China, New York, NY 10022, USA

Received 1 December 2013; Accepted 30 January 2014; Published 12 March 2014

Academic Editor: Chuangxia Huang

Copyright © 2014 Rongda Chen et al. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

Abstract

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.