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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 intra-regime 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. A Value-at-Risk example illustrates the economic value of our approach.

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Bibliographic Info

Paper provided by University of Toronto, Department of Economics in its series Working Papers with number tecipa-402.

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Length: 37 pages
Date of creation: 06 Apr 2010
Date of revision:
Handle: RePEc:tor:tecipa:tecipa-402

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Keywords: Markov switching; Gibbs sampling; turning points;

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Citations

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Cited by:
  1. 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 Uni.
  2. 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.
  3. repec:hal:cesptp:halshs-00658540 is not listed on IDEAS
  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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