Share This Article:

Duration Dependence in Bull and Bear Stock Markets

Abstract Full-Text HTML Download Download as PDF (Size:169KB) PP. 279-286
DOI: 10.4236/me.2011.23031    4,326 Downloads   7,592 Views   Citations

ABSTRACT

Testing duration in stock markets concerns the ability to predict the turning points of bull and bear cycles. The Weibull renewal process has been used in previous studies to analyze duration dependence in economic and financial cycles. A goodness-of-fit test, however, shows that this model does not fit data from U.S. stock market cycles. As a solution, this study fits the modulated power law process that relies on less restrictive assumptions. Moreover, it measures both the long term properties of bull and bear markets, such as the tendency of the cycles to become shorter (or longer), as well as the short term effects, such as duration dependence. The results give evidence of negative duration dependence in all samples of bull markets and evidence of positive duration dependence in complete, peacetime and post WWII samples of bear markets. There is no evidence of any structural change in duration dependence after WWII in either bull or bear markets. The results show that bull and bear markets tend to get progressively shorter, but for bull markets this trend has accelerated since WWII whereas for bear markets this trend has decelerated since WWII. Goodness-of-fit tests suggest that the modulated power is a suitable model for U.S. stock market cycles.

Conflicts of Interest

The authors declare no conflicts of interest.

Cite this paper

H. Zhou and S. Rigdon, "Duration Dependence in Bull and Bear Stock Markets," Modern Economy, Vol. 2 No. 3, 2011, pp. 279-286. doi: 10.4236/me.2011.23031.

References

[1] J. E. Payne and T. W. Zuehlke, “Duration Dependence in Real Estate Investment Trusts,” Applied Financial Economics, Vol. 16, No. 5, 2006, pp. 413-423. doi:10.1080/09603100500391099
[2] S. J. Cochran and R. H. Defina, “Duration Dependence in the US Stock Market Cycle: A Parametric Approach,” Applied Financial Economics, Vol. 5, No. 5, 1995, pp. 27-37. doi:10.1080/758522757
[3] D. E. Sichel, “Business Cycle Duration Dependence: A Parametric Approach,” The Review of Economics and Statistics, Vol. 73, No. 2, 1991, pp. 254-260. doi:10.2307/2109515
[4] H. Zhou and S. E. Rigdon, “Duration Dependence in U.S. Business Cycles: An Analysis Using the Modulated Power Law Process,” Journal of Economics and Finance, Vol. 32, No. 1, 2008, pp. 25-34. doi:10.1007/s12197-007-9005-3
[5] M. Berman, “Inhomogeneous and Modulated Gamma Processes,” Biometrika, Vol. 68, No. 1, 1982, pp. 142- 152.
[6] M. J. Lakey and S. E. Rigdon, “The Modulated Power Law Process,” Proceedings of the 45th Annual Quality Congress, Milwaukee, 20-22 May 1991, pp. 559-563.
[7] S. E. Black and S. E. Rigdon, “Statistical Inference for a Modulated Power Law Process,” Journal of Quality Technology, Vol. 28, No. 1, 1996, pp. 81-90.
[8] R. Frisch, “Propagation and Impulse Problems in Dynamic Economics,” Economic Essays in Honor of Gustav Cassel, Allen and Unwin, London, 1933, pp. 171-173, 181-190, 197-203.
[9] E. Slutsky, “The Summation of Random Causes as the Source of Cyclic Processes,” Econometrica, Vol. 5, No. 2, 1937, pp. 105-146. doi:10.2307/1907241
[10] S. Chatterjee, “From Cycles to Shocks: Progress in Business-Cycle Theory,” 2000. http://www.phil.frb.org/files/br/brma00sc.pdf
[11] B. S. Bernanke, M. Gertler and S. Gilchrist, “The Financial Accelerator in a Quantitative Business Cycle Frame- work,” Review of Economics and Statistics, Vol. 78, No. 1, 1996, pp. 1-15.
[12] C. Nolan and C. Thoenissen, “Financial Shocks and the US Business Cycle,” Journal of Monetary Economics, Vol. 56, No. 4, 2009, pp. 596-604. doi:10.1016/j.jmoneco.2009.03.007
[13] A. R. Pagan and K. A. Sossounov, “A Simple Framework for Analysing Bull and Bear Markets,” Journal of Applied Econometrics, Vol. 18, No. 1, 2003, pp. 23-46. doi:10.1002/jae.664
[14] M. A. Stephens, “Tests Based on EDF Statistics,” In: R. B. D’Agostino and M. A. Stephens, Eds., Goodness-of- -Fit Techniques, Marcel Dekker, New York, 1986, pp. 97-193.

  
comments powered by Disqus

Copyright © 2018 by authors and Scientific Research Publishing Inc.

Creative Commons License

This work and the related PDF file are licensed under a Creative Commons Attribution 4.0 International License.