Stock Craze: an Empirical Analysis of PER in Chinese Equity Market

China's Shanghai and Shenzhen stock markets have been on a bullish run since the end of the split-share reform. The sharp gains are raising worries about stock overvaluations. We investigate the determinants of booming stock markets in modelling PER (price-earning ratio) over the available sample period 2000-2007 in Chinese A-share market with co-integration and error correction model specification. These results show that the market is driven primarily by the massive influx of fresh funds rather than corporate fundamentals. Regulators have been striving to cool down the surging stock markets for the good of long-term economic development and social stability.

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