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Duration Dependence in Stock Prices: An Analysis of Bull and Bear Markets

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  • Lunde, Asger
  • Timmermann, Allan G

Abstract

This paper studies time-series dependence in the direction of stock prices by modelling the (instantaneous) probability that a bull or bear market terminates as a function of its age and a set of underlying state variables such as interest rates. A random walk model is rejected both for bull and bear markets. Although it fits the data better, a GARCH model is also found to be inconsistent with the very long bull markets observed in the data. The strongest effect of increasing interest rates is found to be a lower bear market hazard rate and hence a higher chance of continued declines in stock prices.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4104.

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Date of creation: Nov 2003
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Handle: RePEc:cpr:ceprdp:4104

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Keywords: Hazard model; interest rate effect; survival rate;

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