Two centuries of bull and bear markets

Two methods for identifying bull and bear markets in stock indices are developed and applied to a long period of U.S. stock market data. Turning points in the stock market are documented and the characteristics of the bull and bear markets identified are examined. Results show that significant bull and bear markets do exist in stock market returns, that the returns in these two states differ significantly, and that these states tend to persist for some time. The returns during the first six months of a bull market are found to be higher than those in the remaining months. Over the time period studied, the gains in bull markets have become greater, as have the losses during bear markets. The analysis appears to imply that seasonalities could be related to bull and bear markets.UnpublishedBhabra, H.S., U.S. Dhillon, and G.G. Ramirez, 1999, A November effect? Revisiting the tax-loss-selling hypothesis, Financial Management, Forthcoming. Bry, G., and C. Boschen, 1971, Cyclical analysis of time series: selected procedures and computer programs, New York, NBER. Cambell, J.Y., and R. Shiller, 1988, The dividend-price ratio and expectations of future dividends and discount factors, Review of Financial Studies 1 (Fall), 195-228. Dimson, E., P. Marsh, and M. Staunton, 2000, Risk and return in the 20 th and 21St centuries, Business Strategy Review, 11:2. Fama, E.F., and K.R. French, 1988, Dividend yields and expected stock returns, Journal of Financial Economics, 22, 3-25. Gitman, L.J., and M.D. Joehnk, 1996, Fundamentals of Investing, New York, HarperCollins. Hamilton, J.D., and G. Lin, 1996, Stock market volatility and the business cycle, Journal of Applied Econometrics, 11, 573-593. Ibbotson, R.G., and J.F. Jaffe, 1975, "Hot issue" markets, .Journal of Finance, 30:4, 1027-1042. Maheu, J.M., and T.H. McCurdy, 2000, Identifying bull and bear markets in stock returns, Journal of Business and Economic Statistics, 18:1, 100-112. Pagan, A.R., 1999, A framework for understanding bull and bear markets, Working paper, Australian National University. Pagan, A.R., and K.A. Sossounov, 2000, A simple framework for analysing bull and bear markets, Working paper, Australian National University. Schaller, H., and S. Van Norden, 1997, Fads or bubbles?, Working paper, Bank of Canada. Schwert, G.W., 1990, Indexes of U.S. stock prices from 1802 to 1987, Journal of Business, 63:3, 399-442. Turner, C.M., R. Startz, and C.R. Nelson, 1989, A Markov model of heteroskedasticity, risk, and learning in the stock market, Journal of Financial Economics, 25, 3-22. Xiao, H., 1992, A cumulative score control scheme, Journal of Applied Statistics, 41:1, 47-54