Investing In the Modern Age by Rachel E S Ziemba

Author:Rachel E S Ziemba
Language: eng
Format: epub
Publisher: World Scientific Publishing Company
Published: 2013-03-14T16:00:00+00:00

Fig. 22.5 Long bond yield to maturity of Treasury bonds in Shanghai stock exchange, 2002-3-31 to 2007-1-28. Source: Ruoen (2007)

Figure 22.5 shows the long bond (5-year) Treasury bond rates on the Shanghai stock exchange from 2002 to early 2007. Since these rates are currently about 2.9%, the bond-stock model is riot in the danger zone in China despite these high PE ratios. But the trend of Chinese interest rates is higher so the situation must be watched carefully The measure is about 2.9 – (100/37.57) = 0.24, which is below the danger level. Since Chinese interest rates have historically been below those in the US, the danger zone is well below the about 3% long bond minus stock earnings yield danger level for the US. Chapter 21 shows that the Shanghai stock exchange did enter the danger zone on December 12 or 25, 2006 with the index of 2218.95 (95% confidence signal) and 2435.76 (99% confidence signal). It then rose to 6092.06 on October 16, 2007 and subsequently fell to 1706.70 on November 4, 2008, a drop of 23.09% and 29.93% from the initial signals on December 12 and 25, 2006.

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