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Identifying Bull and Bear Markets in Stock Returns

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  • Maheu, John M
  • McCurdy, Thomas H

Abstract

This article uses a Markov-switching model that incorporates duration dependence to capture non-linear structure in both the conditional mean and the conditional variance of stock returns. The model sorts returns into a high-return stable state and a low-return volatile state. We label these as bull and bear markets, respectively. The filter identifies all major stock-market downturns in over 160 years of monthly data. Bull markets have a declining hazard function although the best market gains come at the start of a bull market. Volatility increases with duration in bear markets. Allowing volatility to vary with duration captures volatility clustering.

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Bibliographic Info

Article provided by American Statistical Association in its journal Journal of Business and Economic Statistics.

Volume (Year): 18 (2000)
Issue (Month): 1 (January)
Pages: 100-112

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Handle: RePEc:bes:jnlbes:v:18:y:2000:i:1:p:100-112

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