Further evidence on bear market predictability

The role of the external finance premium

Nan Kuang Chen, Shiu Sheng Chen, Yu Hsi Chou

Research output: Contribution to journalArticle

3 Citations (Scopus)

Abstract

This paper revisits bear market predictability by employing a number of variables widely used in forecasting stock returns. In particular, we focus on variables related to the presence of imperfect credit markets. We evaluate prediction performance using in-sample and out-of-sample tests. Empirical evidence from the US stock market suggests that among the variables we investigate, the default yield spread, inflation, and the term spread are useful in predicting bear markets. Further, we find that the default yield spread provides superior out-of-sample predictability for bear markets one to three months ahead, which suggests that the external finance premium has an informative content on the financial market.

Original languageEnglish
Pages (from-to)106-121
Number of pages16
JournalInternational Review of Economics and Finance
Volume50
DOIs
Publication statusPublished - 2017 Jul 1

Fingerprint

Bear market
External finance
Predictability
Premium
Yield spread
Term spread
Financial markets
Prediction
Stock returns
Empirical evidence
Credit markets
Inflation
Stock market

Keywords

  • Bear markets
  • Markov-switching model
  • Stock returns

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

Cite this

Further evidence on bear market predictability : The role of the external finance premium. / Chen, Nan Kuang; Chen, Shiu Sheng; Chou, Yu Hsi.

In: International Review of Economics and Finance, Vol. 50, 01.07.2017, p. 106-121.

Research output: Contribution to journalArticle

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