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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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    5. 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.
    6. Zhang, Tongbin, 2021. "Stock prices and the risk-free rate: An internal rationality approach," Journal of Economic Dynamics and Control, Elsevier, vol. 127(C).
    7. Oliver de Groot & Alexander W. Richter & Nathaniel A. Throckmorton, 2022. "Valuation risk revalued," Quantitative Economics, Econometric Society, vol. 13(2), pages 723-759, May.
    8. Martin Hodula & Jan Janku & Lukas Pfeifer, 2021. "Interaction of Cyclical and Structural Systemic Risks: Insights from Around and After the Global Financial Crisis," Research and Policy Notes 2021/03, Czech National Bank.
    9. Lyócsa, Štefan & Výrost, Tomáš & Plíhal, Tomáš, 2021. "A tale of tails : New evidence on the growth-return nexus," Finance Research Letters, Elsevier, vol. 38(C).
    10. Long, Huaigang & Zaremba, Adam & Zhou, Wenyu & Bouri, Elie, 2022. "Macroeconomics matter: Leading economic indicators and the cross-section of global stock returns," Journal of Financial Markets, Elsevier, vol. 61(C).
    11. Gareth Lui-Evans & Shalini Mitra, 2019. "Informality and Bank Stability," Working Papers 201903, University of Liverpool, Department of Economics.
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    13. Cakici, Nusret & Zaremba, Adam, 2023. "Misery on Main Street, victory on Wall Street: Economic discomfort and the cross-section of global stock returns," Journal of Banking & Finance, Elsevier, vol. 149(C).
    14. Zaremba, Adam & Cakici, Nusret & Bianchi, Robert J. & Long, Huaigang, 2023. "Interest rate changes and the cross-section of global equity returns," Journal of Economic Dynamics and Control, Elsevier, vol. 147(C).
    15. John Stachurski & Junnan Zhang, 2019. "Dynamic Programming with State-Dependent Discounting," Papers 1908.08800, arXiv.org, revised Oct 2020.
    16. 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.
    17. Ibrahim M. Awad & Abdel-Rahman Al-Ewesat, 2017. "Volatility Persistence in Palestine Exchange Bulls and Bears: An Econometric Analysis of Time Series Data," Review of Economics & Finance, Better Advances Press, Canada, vol. 9, pages 83-97, August.
    18. Andrew Filardo & Mr. Gaston Gelos & Thomas McGregor, 2022. "Exchange-Rate Swings and Foreign Currency Intervention," IMF Working Papers 2022/158, International Monetary Fund.
    19. Baltussen, Guido & Swinkels, Laurens & Van Vliet, Pim, 2021. "Global factor premiums," Journal of Financial Economics, Elsevier, vol. 142(3), pages 1128-1154.
    20. Hanna, Alan J., 2018. "A top-down approach to identifying bull and bear market states," International Review of Financial Analysis, Elsevier, vol. 55(C), pages 93-110.

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    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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