Components of Bull and Bear Markets: Bull Corrections and Bear Rallies

13 Pages Posted: 7 Nov 2012

See all articles by John M. Maheu

John M. Maheu

McMaster University - Michael G. DeGroote School of Business; RCEA

Thomas H. McCurdy

University of Toronto - Rotman School of Management

Yong Song

University of Technology Sydney (UTS) - Centre for the Study of Choice

Multiple version iconThere are 2 versions of this paper

Date Written: February 8, 2009

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. We show how to compute the predictive density of long-horizon returns and discuss the improvements our model provides over benchmarks. This article has online supplementary materials.

Keywords: predictive density, long-horizon returns, Markov switching

JEL Classification: C11, C22, G10

Suggested Citation

Maheu, John M. and McCurdy, Thomas H. and Song, Yong, Components of Bull and Bear Markets: Bull Corrections and Bear Rallies (February 8, 2009). Journal of Business & Economic Statistics, July 2012, Vol. 30, No. 3, pp. 391-403, Rotman School of Management Working Paper No. 2171892, Available at SSRN: https://ssrn.com/abstract=2171892

John M. Maheu

McMaster University - Michael G. DeGroote School of Business ( email )

1280 Main Street West
Hamilton, Ontario L8S 4M4
Canada

HOME PAGE: http://profs.degroote.mcmaster.ca/ads/maheujm/

RCEA

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Italy

HOME PAGE: http://www.rcfea.org/

Thomas H. McCurdy (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada
416-978-3425 (Phone)
416-971-3048 (Fax)

HOME PAGE: http://www-2.rotman.utoronto.ca/~tmccurdy

Yong Song

University of Technology Sydney (UTS) - Centre for the Study of Choice ( email )

Level 4
645 Harris Street
Ultimo, New South Wales NSW 2007
Australia

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