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Further evidence on bear market predictability: The role of the external finance premium

Nan-Kuang Chen (), Shiu-Sheng Chen and Yu-Hsi Chou

International Review of Economics & Finance, 2017, vol. 50, issue C, 106-121

Abstract: This paper revisits bear market predictability by employing a number of variables widely used in forecasting stock returns. In particular, we focus on variables related to the presence of imperfect credit markets. We evaluate prediction performance using in-sample and out-of-sample tests. Empirical evidence from the US stock market suggests that among the variables we investigate, the default yield spread, inflation, and the term spread are useful in predicting bear markets. Further, we find that the default yield spread provides superior out-of-sample predictability for bear markets one to three months ahead, which suggests that the external finance premium has an informative content on the financial market.

Keywords: Bear markets; Stock returns; Markov-switching model (search for similar items in EconPapers)
JEL-codes: G10 C53 (search for similar items in EconPapers)
Date: 2017
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Working Paper: Further evidence on bear market predictability: The role of the external finance premium (2013) Downloads
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