Long-run Bulls and Bears
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.
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. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Albuquerque, Rui & Eichenbaum, Martin & Papanikolaou, Dimitris & Rebelo, Sergio, 2015. "Long-run bulls and bears," Journal of Monetary Economics, Elsevier, vol. 76(S), pages S21-S36. citation courtesy of