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)


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
Publication statusPublished - 2017 Jul 1



  • Bear markets
  • Markov-switching model
  • Stock returns

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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