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A simple framework for analysing bull and bear markets

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Author Info

  • Adrian R. Pagan

    (Economics Program, Research School of Social Sciences, Australian National University, Canberra, ACT 0200, Australia and Nuffield College, University of Oxford)

  • Kirill A. Sossounov

    (New Economic School, Moscow)

Abstract

Bull and bear markets are a common way of describing cycles in equity prices. To fully describe such cycles one would need to know the data generating process (DGP) for equity prices. We begin with a definition of bull and bear markets and use an algorithm based on it to sort a given time series of equity prices into periods that can be designated as bull and bear markets. The rule to do this is then studied analytically and it is shown that bull and bear market characteristics depend upon the DGP for capital gains. By simulation methods we examine a number of DGPs that are known to fit the data quite well-random walks, GARCH models, and models with duration dependence. We find that a pure random walk provides as good an explanation of bull and bear markets as the more complex statistical models. In the final section of the paper we look at some asset pricing models that appear in the literature from the viewpoint of their success in producing bull and bear markets which resemble those in the data. Copyright © 2002 John Wiley & Sons, Ltd.

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File URL: http://hdl.handle.net/10.1002/jae.664
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Bibliographic Info

Article provided by John Wiley & Sons, Ltd. in its journal Journal of Applied Econometrics.

Volume (Year): 18 (2003)
Issue (Month): 1 ()
Pages: 23-46

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Handle: RePEc:jae:japmet:v:18:y:2003:i:1:p:23-46

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  1. Daniel E. Sichel, 1992. "Inventories and the three phases of the business cycle," Working Paper Series / Economic Activity Section 128, Board of Governors of the Federal Reserve System (U.S.).
  2. Lunde A. & Timmermann A., 2004. "Duration Dependence in Stock Prices: An Analysis of Bull and Bear Markets," Journal of Business & Economic Statistics, American Statistical Association, vol. 22, pages 253-273, July.
  3. Pagan, Adrian, 1996. "The econometrics of financial markets," Journal of Empirical Finance, Elsevier, vol. 3(1), pages 15-102, May.
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