Identifying Bull and Bear Markets in Stock Returns

Posted: 3 Jun 2002

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; Center for Interuniversity Research and Analysis on Organization (CIRANO)

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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.

Keywords: high-frequency data, realized volatility, semi-Markov

JEL Classification: C22, C50, G14

Suggested Citation

Maheu, John M. and McCurdy, Thomas H., Identifying Bull and Bear Markets in Stock Returns. Journal of Business & Economic Statistics, Vol. 18, No. 1, January 2000, Available at SSRN: https://ssrn.com/abstract=307799

John M. Maheu (Contact Author)

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

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Thomas H. McCurdy

University of Toronto - Rotman School of Management ( email )

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

Center for Interuniversity Research and Analysis on Organization (CIRANO)

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