Discussion Paper Details

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Title: Duration Dependence in Stock Prices: An Analysis of Bull and Bear Markets

Author(s): Asger Lunde and Allan Timmermann

Publication Date: November 2003

Keyword(s): Hazard model, interest rate effect and survival rate

Programme Area(s): Financial Economics

Abstract: This paper studies time-series dependence in the direction of stock prices by modelling the (instantaneous) probability that a bull or bear market terminates as a function of its age and a set of underlying state variables such as interest rates. A random walk model is rejected both for bull and bear markets. Although it fits the data better, a GARCH model is also found to be inconsistent with the very long bull markets observed in the data. The strongest effect of increasing interest rates is found to be a lower bear market hazard rate and hence a higher chance of continued declines in stock prices.

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Bibliographic Reference

Lunde, A and Timmermann, A. 2003. 'Duration Dependence in Stock Prices: An Analysis of Bull and Bear Markets'. London, Centre for Economic Policy Research.