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Power laws in market capitalization during the Dot-com and Shanghai bubble periods

Author

Listed:
  • Takayuki Mizuno

    (National Institute of Informatics, Graduate School of Economics University of Tokyo)

  • Takaaki Ohnishi

    (Graduate School of Information Science and Technology The University of Tokyo, The Canon Institute for Global Studies)

  • Tsutomu Watanabe

    (Graduate School of Economics, University of Tokyo)

Abstract

The distributions of market capitalization across stocks listed in the NASDAQ and Shanghai stock exchanges have power law tails. The power law exponents associated with these distributions fluctuate around one, but show a substantial decline during the dot-com bubble in 1997-2000 and the Shanghai bubble in 2007. In this paper, we show that the observed decline in the power law exponents is closely related to the deviation of the market values of stocks from their fundamental values. Specifically, we regress market capitalization of individual stocks on financial variables, such as sales, profits, and asset sizes, using the entire sample period (1990 to 2015) in order to identify variables with substantial contributions to fluctuations in fundamentals. Based on the regression results for stocks in listed in the NASDAQ, we argue that the fundamental value of a company is well captured by the value of its net asset, therefore a price book-value ratio (PBR) is a good measure of the deviation from fundamentals. We show that the PBR distribution across stocks listed in the NASDAQ has a much heavier upper tail in 1997 than in the other years, suggesting that stock prices deviate from fundamentals for a limited number of stocks constituting the tail part of the PBR distribution. However, we fail to obtain a similar result for Shanghai stocks.

Suggested Citation

  • Takayuki Mizuno & Takaaki Ohnishi & Tsutomu Watanabe, 2016. "Power laws in market capitalization during the Dot-com and Shanghai bubble periods," CARF F-Series CARF-F-392, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    • Handle: RePEc:cfi:fseres:cf392
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    References listed on IDEAS

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    Cited by:

    1. Mizuno, Takayuki & Ohnishi, Takaaki & Watanabe, Tsutomu, 2017. "Stock market bubble detection based on the price dispersion among similar listed Firms," HIT-REFINED Working Paper Series 67, Institute of Economic Research, Hitotsubashi University.
    2. Takayuki Mizuno & Takaaki Ohnishi & Tsutomu Watanabe, 2019. "Detecting stock market bubbles based on the cross-sectional dispersion of stock prices," CARF F-Series CARF-F-463, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    3. Takayuki Mizuno & Takaaki Ohnishi & Tsutomu Watanabe, 2019. "Detecting stock market bubbles based on the cross-sectional dispersion of stock prices," Working Papers on Central Bank Communication 010, University of Tokyo, Graduate School of Economics.
    4. David Vidal-Tomás & Simone Alfarano, 2020. "An agent-based early warning indicator for financial market instability," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 15(1), pages 49-87, January.

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