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

  • Lunde A.
  • Timmermann A.

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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Article provided by American Statistical Association in its journal Journal of Business and Economic Statistics.

Volume (Year): 22 (2004)
Issue (Month): (July)
Pages: 253-273

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Handle: RePEc:bes:jnlbes:v:22:y:2004:p:253-273
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