Selecting a better valuation model to measure bubble level of stocks price: empirical study from internet-based finance stocks in A-share market

Abstract

As a star of emerging industries in China, internet-based finance has been developing rapidly. This paper, considers selecting a more suitable valuation model to measure the intrinsic value and price bubble of Internet-based Finance stocks. By comparing the relative valuation accuracy of the Kim et al. model with the Frankel-Lee model and the F-O model applied in the prior studies, this study finds that the Kim et al. model highlights the industry-specific features and outperforms other models in interpreting stocks price variation. Especially, under the circumstance of soaring and slumping stocks price variation (e.g. 2015), it is essential to study the price bubbles of internetbased finance stocks at different points of Shanghai Stock Exchange Composite Index. Surprisingly, our empirical results suggest that the internet-based finance stocks have negative bubbles at the whole average level, and about half of them are undervalued. Moreover, there are positive correlations between the bubble level and three key factors including the trading volume, the price to book ratio and whether to do cross-industry business on internet-based finance. These findings imply that the Kim et al. model contributes to improving valuation accuracy of internet-based finance stocks and explainability of the price bubbles in A-share market.

Testing for Bubbles in the Chinese Art Market

“…In terms of detecting the "bubble" phenomena, the existing studies have used different techniques to investigate possible bubbles (Froot & Obstfeld, 1991;Jarrow, 2016;West, 1987;Zhao et al, 2018). For instance, West (1987) utilizes the two-step test to detect speculative bubbles in the U.S. stock market.…”

“…For instance, West (1987) utilizes the two-step test to detect speculative bubbles in the U.S. stock market. Zhao et al (2018) apply the Frankel-Lee (Frankel & Lee, 1998) model and the Kim et al (2013) model to measure the intrinsic value of China's Internet-based finance stocks. Then they use differences between stock prices and the calculated intrinsic value to evaluate price bubbles.…”

Generalized Financial Cycle Theory From the Minsky’s Perspective: Uk 1270–2016

“…We still miss a relevant study on the true nature of financial cycles and its theoretical explanation. Close attention should be also placed on a new measure the intrinsic value and price bubble of Internet-based finance stocks (Zhao et al, 2018).…”