Extracting bull and bear markets from stock returns
AbstractTraditional methods used to partition the market index into bull and bear regimes often sort returns ex post based on a deterministic rule. We model the entire return distribution; two states govern the bull regime and two govern the bear regime, allowing for rich and heterogeneous intra-regime dynamics. Our model can capture bear market rallies and bull market corrections. A Bayesian estimation approach accounts for parameter and regime uncertainty and provides probability statements regarding future regimes and returns. Applied to 123 years of data our model provides superior identification of trends in stock prices.
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Bibliographic InfoPaper provided by University of Toronto, Department of Economics in its series Working Papers with number tecipa-369.
Length: 34 pages
Date of creation: 06 Aug 2009
Date of revision:
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Markov switching; bear market rallies; bull market corrections; Gibbs sampling;
Find related papers by JEL classification:
- C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models &bull Diffusion Processes
- C50 - Mathematical and Quantitative Methods - - Econometric Modeling - - - General
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
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