Estimating Fundamental Value and the Size of Rational Speculative Bubbles of Hong Kong Stock Market during the Year

Abstract

Rational speculative bubble can be well-defined as transient upward movements of stock prices above fundamental value due to speculative investors. The Generalised Johansen-Ledoit-Sornette (GJLS) model has been developed as a flexible device to diagnose the size of rational speculative bubble. This model is combines the economic theory of rational expectation bubbles with finite-time singular crash hazard rates, behavioral finance on imitation and herding of investors and traders as well as mathematical statistical physics of bifurcations and phase transitions. It has been employed successfully to a large variety of stock bubbles in many different markets. The purpose of this study is to predict intrinsic value and size of rational speculative bubble of Hong Kong stock market during global economic crisis 2008. The intrinsic value predicted by using the selected time interval is 20997.03 which shows that the market value is deviated about 33.63% from its fundamental value. This deviation is called as size of the speculative rational bubble that formed during global economic crisis 2008. By using the predicted intrinsic value, we found that the rational speculative bubble start to form and grow in Hong Kong stock market from 15/06/2006 to 10/12/2007. There are two bubble phases found in the period of selected time interval. It is essential needs for researcher to study on financial bubbles. It is because the economic bubbles are one of the serious issue that give negative implications to the development of economy which is the factor leads to an economy crisis