Antibubble and prediction of China's stock market and real-estate

Abstract

We show that the Chinese stock markets are quite different and decoupled from Western markets (which include Tokyo). 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 (October 2002–October 2003). Many tests, including predictability over different horizons and time periods, confirm the high significance of the antibubble detection. Based on an analysis including data up to 2003/10/28, we have predicted 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. We present a partial assessment of this prediction at the time of revision of this manuscript (early January 2004). 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.