Working Paper: CEPR ID: DP4104
Authors: Asger Lunde; Allan G. Timmermann
Abstract: This paper studies time-series dependence in the direction of stock prices by modelling the (instantaneous) probability that a bull or bear market terminates as a function of its age and a set of underlying state variables such as interest rates. A random walk model is rejected both for bull and bear markets. Although it fits the data better, a GARCH model is also found to be inconsistent with the very long bull markets observed in the data. The strongest effect of increasing interest rates is found to be a lower bear market hazard rate and hence a higher chance of continued declines in stock prices.
Keywords: hazard model; interest rate effect; survival rate
JEL Codes: G0
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| age of bull market (E32) | hazard rate of bull market (G17) |
| age of bear market (N22) | hazard rate of bear market (G17) |
| interest rates (E43) | hazard rate of bear market (G17) |