Do Stock Returns Rebound After Bear Markets? An Empirical Analysis From Five OECD Countries

This paper proposes an empirical study of the shape of recoveries in - nancial markets from a bounce-back augmented Markov Switching model. It relies on models rst applied by Kim, Morley and Piger [2005] to the busi- ness cycle analysis. These models are estimated for monthly stock market returns data of ve developed countries for the post-1970 period. Focus- ing on a potential bounce-back eect in nancial markets, its presence and shape are formally tested. Our results show that i) the bounce-back eect is statistically signicant and large in all countries, but Germany where evi- dence is less clear-cut and ii) the negative permanent impact of bear markets on the stock price index is notably reduced when the rebound is explicitly taken into account.