Test For Rational Speculative Bubbles In China’s A-share Market Based On The Cross-section Of Stock Returns

After more than 30 years of development,China’s A-share market has begun to take shape,and its importance in China’s financial market has also continued to increase.Nevertheless,due to the imperfect market mechanism and imperfect regulatory system,the phenomenon of speculation in China’s A-share market is serious,skyrocketing and slumping occur from time to time.The risk of bubble formation cannot be ignored.The stock market bubble will not only damage the interests of investors,but also aggravate the accumulation of systemic risks and threaten financial stability.In this context,it has important theoretical and practical significance to detect the stock price bubble in China’s A-share market and explore its causes.First of all,this article takes China’s A-share stocks from 2009 to 2018 as an observation sample,and refers to Jang and Kang(2019)using the Generalized Logit Model to construct a stock price crash probability index to detect stock price bubbles and verifying its effectiveness in China’s stock market;secondly,based on the arbitrage restriction theory and rational speculation theory,this article further explores the causes of China’s A-share bubbles.The empirical results show that:first,the stock price crash probability constructed based on the Generalized Logit Model can effectively identify and measure stock price bubbles,and the specific performance is that the change in the stock price crash probability conforms to the life cycle characteristics of the stock price bubble,and the stock price crash probability and the future cross-sectional returns of the stocks are negatively correlated and this negative correlation cannot be explained by risk pricing factors and other company characteristic variables;second,stocks with high liquidity and high institutional shareholding can also have significant stock price bubbles,and there is no significant difference in the impact of market sentiment on the stock price bubble no matter the market sentiment is high or low,indicating that the arbitrage restriction theory cannot fully explain the stock price bubble in the A-share market;third,institutional investors,such as brokerage firms,insurance companies,social security funds,and trusts,tend to increase their holdings of stocks with high stock price crash probability before the stock price bubble bursts,and institutional investors who hold large stocks with high stock price crash probability can obtain significant higher excess returns than that of other institutional investors.In other words,in China’s Ashare market,some institutional investors have the ability to judge the timing of stock price bubble bursting and obtain excess returns by riding the bubble.This result supports the rational speculative bubble explanation and indicates that there is a rational speculative component in the stock price bubble of China’s A-shares.