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.


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