Are Bull and Bear Markets Economically Important?

摘要

As fluctuations of the stock market have long been classified into bull and bear markets, investors encounter regime-switching uncertainty in investing. In this paper, we propose a novel way of incorporating regime-switching and model uncertainties into portfolio choice decisions. We find that risks and returns vary greatly across bull and bear regimes, and the certainty-equivalent losses associated with ignoring bull and bear markets are fairly large. Therefore, the economic value of incorporating regime-switching is substantial from an investment perspective.