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Long-run bulls and bears

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  • Albuquerque, Rui
  • Eichenbaum, Martin
  • Papanikolaou, Dimitris
  • Rebelo, Sergio

Abstract

A central challenge in asset pricing is the weak connection between stock returns and observable economic fundamentals. We provide evidence that this connection is stronger than previously thought. We use a modified version of the Bry–Boschan algorithm to identify long-run swings in the stock market. We call these swings long-run bull and bear episodes. We find that there is a high correlation between stock returns and fundamentals across bull and bear episodes. This correlation is much higher than the analogous time-series correlations. We show that several asset pricing models cannot simultaneously account for the low time-series and high episode correlations.

Suggested Citation

  • Albuquerque, Rui & Eichenbaum, Martin & Papanikolaou, Dimitris & Rebelo, Sergio, 2015. "Long-run bulls and bears," Journal of Monetary Economics, Elsevier, vol. 76(S), pages 21-36.
  • Handle: RePEc:eee:moneco:v:76:y:2015:i:s:p:s21-s36
    DOI: 10.1016/j.jmoneco.2015.09.010
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    Cited by:

    1. Andrew Filardo & Marco Jacopo Lombardi & Marek Raczko, 2018. "Measuring financial cycle time," BIS Working Papers 755, Bank for International Settlements.
    2. Lamperti, F. & Dosi, G. & Napoletano, M. & Roventini, A. & Sapio, A., 2018. "Faraway, So Close: Coupled Climate and Economic Dynamics in an Agent-based Integrated Assessment Model," Ecological Economics, Elsevier, vol. 150(C), pages 315-339.
    3. Isoré, Marlène & Szczerbowicz, Urszula, 2017. "Disaster risk and preference shifts in a New Keynesian model," Journal of Economic Dynamics and Control, Elsevier, vol. 79(C), pages 97-125.
    4. Yimin Xu & Jakob de Haan, 2016. "Does the Fed's unconventional monetary policy weaken the link between the financial and the real sector?," DNB Working Papers 529, Netherlands Central Bank, Research Department.
    5. repec:bap:journl:170307 is not listed on IDEAS
    6. repec:eee:finana:v:55:y:2018:i:c:p:93-110 is not listed on IDEAS

    More about this item

    Keywords

    Stock market returns;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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