A closer look at the regime-switching evidence of bull and bear markets

Chris Kirby

Finance Research Letters, 2023, vol. 52, issue C

Abstract: Studies that use Markov-switching models to identify bull and bear markets indicate that conditional expected market returns display substantial variation over time. However, I find that in-sample tests fail to produce any evidence that these models predict market returns. To explain this finding, I show that the estimated expected return for the bull regime must differ from the estimated expected return for the bear regime in order to capture skewness. Because market returns display negative skewness, the Markov-switching estimates of conditional expected returns will typically vary over time, regardless of whether there is any actual variation in conditional expected returns.

Keywords: Stock market cycles; Markov switching model; Conditional skewness; Return predictability; Time-varying expected returns (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:52:y:2023:i:c:s1544612322005463

DOI: 10.1016/j.frl.2022.103369

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