Crash Prediction Using Fundamental Variables: Evidence from Mainland China

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Sébastien Lleo
William T. Ziemba


This article investigates how fundamental crash prediction models perform in mainland China’s fast-growing equity markets. We apply three families of fundamental models, price-to-earnings ratio, cyclically adjusted price-to-earnings ratio, and bond-stock earnings yield differential, to the Shanghai and Shenzhen stock indices. Our statistical analysis supports the dominant view that Chinese equity markets behave different from U.S. markets. We find that fundamental models are significant predictors of equity market crashes in China despite these differences. Finally, we show how to use these crash prediction models to improve active portfolio management.

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Author Biography

Sébastien Lleo, Finance Department, NEOMA Business School, 59 rue Pierre Taittinger, 51100 Reims, France 2020 Bruti-Liberati Fellow, Quantitative Finance Research Center, University of Technology Sydney, Sydney, Australia