Long-run bulls and bears

Martin Eichenbaum, Sergio Rebelo (), Rui Albuquerque and Dimitris Papanikolaou

No 10351, CEPR Discussion Papers from Centre for Economic Policy Research

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.

Keywords: Stock; market; returns (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
Date: 2015-01
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Citations: View citations in EconPapers (26)

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