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Components of Bull and Bear Markets: Bull Corrections and Bear Rallies

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  • John M. Maheu
  • Thomas H. McCurdy
  • Yong Song

Abstract

Existing methods of partitioning the market index into bull and bear regimes do not identify market corrections or bear market rallies. In contrast, our probabilistic model of the return distribution allows for rich and heterogeneous intraregime dynamics. We focus on the characteristics and dynamics of bear market rallies and bull market corrections, including, for example, the probability of transition from a bear market rally into a bull market versus back to the primary bear state. A Bayesian estimation approach accounts for parameter and regime uncertainty and provides probability statements regarding future regimes and returns. We show how to compute the predictive density of long-horizon returns and discuss the improvements our model provides over benchmarks. This article has online supplementary materials.

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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Journal of Business & Economic Statistics.

Volume (Year): 30 (2012)
Issue (Month): 3 (February)
Pages: 391-403

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Handle: RePEc:taf:jnlbes:v:30:y:2012:i:3:p:391-403

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Cited by:
  1. Li, Ziran & Sun, Jiajing & Wang, Shouyang, 2013. "Amplitude-Duration-Persistence Trade-off Relationship for Long Term Bear Stock Markets," MPRA Paper 54177, University Library of Munich, Germany.
  2. Mathieu Gatumel & Florian Ielpo, 2011. "The Number of Regimes Across Asset Returns: Identification and Economic Value," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00658540, HAL.
  3. Kole, H.J.W.G. & van Dijk, D.J.C., 2013. "How to Identify and Forecast Bull and Bear Markets?," ERIM Report Series Research in Management ERS-2013-016-F&A, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
  4. Yong Song, 2012. "Modelling Regime Switching and Structural Breaks with an Infinite Hidden Markov Model," Working Paper Series 28_12, The Rimini Centre for Economic Analysis.

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