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Do Stock Returns Rebound After Bear Markets? An Empirical Analysis From Five OECD Countries

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  • Frédérique BEC
  • Songlin ZENG

    ()
    (THEMA, Universite de Cergy-Pontoise
    THEMA, Universite de Cergy-Pontoise)

Abstract

This paper proposes an empirical study of the shape of recoveries in - nancial markets from a bounce-back augmented Markov Switching model. It relies on models rst applied by Kim, Morley and Piger [2005] to the busi- ness cycle analysis. These models are estimated for monthly stock market returns data of ve developed countries for the post-1970 period. Focus- ing on a potential bounce-back e ect in nancial markets, its presence and shape are formally tested. Our results show that i) the bounce-back e ect is statistically signi cant and large in all countries, but Germany where evi- dence is less clear-cut and ii) the negative permanent impact of bear markets on the stock price index is notably reduced when the rebound is explicitly taken into account.

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Paper provided by THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise in its series THEMA Working Papers with number 2013-21.

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Date of creation: 2013
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Handle: RePEc:ema:worpap:2013-21

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Keywords: Stock Market Returns; Markov Switching Models; Shape of Bounce- Back;

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  1. Chang-Jin Kim & James Morley & Jeremy Piger, 2003. "Nonlinearity and the permanent effects of recessions," Working Papers 2002-014, Federal Reserve Bank of St. Louis.
  2. Huntley Schaller & Simon Van Norden, 1997. "Regime switching in stock market returns," Applied Financial Economics, Taylor & Francis Journals, vol. 7(2), pages 177-191.
  3. James Morley & Jeremy Piger, 2012. "The Asymmetric Business Cycle," The Review of Economics and Statistics, MIT Press, vol. 94(1), pages 208-221, February.
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  14. Bec, F. & Bouabdallah, O. & Ferrara, L., 2011. "The possible shapes of recoveries in Markov-switching models," Working papers 321, Banque de France.
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  17. Gerhard Bry & Charlotte Boschan, 1971. "Foreword to "Cyclical Analysis of Time Series: Selected Procedures and Computer Programs"," NBER Chapters, in: Cyclical Analysis of Time Series: Selected Procedures and Computer Programs, pages -1 National Bureau of Economic Research, Inc.
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