Identifying Bull and Bear Markets in Stock Returns |
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Authors: | John M maheu Thomas H McCurdy |
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Institution: | 1. Department of Economics , University of Alberta , Edmonton , Alberta , T6G 2H4 , Canada E-mail: john.maheu@ualberta.ca;2. Rotman School of Management, University of Toronto , Toronto , Ontario , M5S 3E6 , Canada E-mail: tmccurdy@mgmt.utoronto.ca |
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Abstract: | This article uses a Markov-switching model that incorporates duration dependence to capture nonlinear structure in both the conditional mean and the conditional variance of stock returns. The model sorts returns into a high-return stable state and a low-return volatile state. We label these as bull and bear markets, respectively. The filter identifies all major stock-market downturns in over 160 years of monthly data. Bull markets have a declining hazard functions although the best market gains come at the start of a bull market. Volatility increases with duration in bear markets. Allowing volatility to vary with duration captures volatility clustering. |
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Keywords: | Duration dependence Filter Markov chain Regime switching |
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