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 financial markets from a bounce-back augmented Markov Switching model. This model is estimated for monthly stock market returns data of five developed countries for the post-1970 period. The presence and shape of the bounce-back effect are formally tested. Our results show that i) the bounce-back effect is statistically significant and large in all countries, but it is less evident in Germany; 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.