Long-run bulls and bears

Rui Albuquerque; Martin Eichenbaum; Dimitris Papanikolaou; Sergio Rebelo

doi:10.1016/j.jmoneco.2015.09.010

Long-run bulls and bears

Rui Albuquerque, Martin Eichenbaum, Dimitris Papanikolaou, Sergio Rebelo^*

^*Corresponding author for this work

Research output: Contribution to journal › Article › peer-review

20 Scopus citations

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.

Original language	English (US)
Pages (from-to)	S21-S36
Journal	Journal of Monetary Economics
Volume	76
DOIs	https://doi.org/10.1016/j.jmoneco.2015.09.010
State	Published - Dec 1 2015

Funding

We thank Gideon Bornstein, Benjamin Johannsen, and Victor Luo for superb research assistance. We benefited from the comments of Bernard Dumas and other participants in the Journal of Monetary Economics-Swiss National Bank-Study Center Gerzensee on Asset Price Fluctuations and Economic Policy. Albuquerque thanks the Portuguese Foundation for Science and Technology-FCT for support under the Grant PTDC/IIM-FIN/2977/2014 .

Keywords

Stock market returns

ASJC Scopus subject areas

Finance
Economics and Econometrics

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10.1016/j.jmoneco.2015.09.010

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AU - Rebelo, Sergio

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AB - 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.

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Long-run bulls and bears

Abstract

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Keywords

ASJC Scopus subject areas

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