DP10351 Long-run bulls and bears

Author(s):	Rui Albuquerque, Martin Eichenbaum, Dimitris Papanikolaou, Sérgio Rebelo
Publication Date:	January 2015
Keyword(s):	stock market returns
JEL(s):	G12
Programme Areas:	Financial Economics
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=10351

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.