Discussion paper

DP10351 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.

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Citation

Eichenbaum, M, S Rebelo, R Albuquerque and D Papanikolaou (2015), ‘DP10351 Long-run bulls and bears‘, CEPR Discussion Paper No. 10351. CEPR Press, Paris & London. https://cepr.org/publications/dp10351