38 Pages Posted: 30 Dec 2014 Last revised: 10 Feb 2017
Date Written: April 15, 2015
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.
Keywords: Stock market returns
JEL Classification: G12
Suggested Citation: Suggested Citation
Albuquerque, Rui A. and Eichenbaum, Martin and Papanikolaou, Dimitris and Rebelo, Sergio T., Long-Run Bulls and Bears (April 15, 2015). Journal of Monetary Economics, 76, S21-S36, 2015.. Available at SSRN: https://ssrn.com/abstract=2543386 or http://dx.doi.org/10.2139/ssrn.2543386