The Precaution Mechanism of P/E Multiple on the Burst of the Stock Market Bubble

The expectation of the market participants makes bubble in stock market a normal status. The bubble of the stock expands to the extent that the stock becomes a bubble stock, and finally bursts. The stock market, built up with thousands of single stock, also follows this rule. FED (Federal) model, got its name from several appearances in federal reports, presenting the precaution mechanism of P/E multiple, makes precaution on the dangerous stock bubble, successfully predicted several crashes in American stock market history. A model which is more applicable for China is built up based on the American FED model, and its effectiveness is examined.