Bull and Bear Markets During the COVID-19 Pandemic

TL;DR

This paper analyzes the U.S. stock market's behavior during COVID-19, identifying market regimes and providing forecasts to aid investors in managing risks during turbulent times.

Contribution

It applies a regime-switching model to capture market dynamics during COVID-19, offering new insights into market regimes and improved forecasting methods.

Findings

Identification of bull and bear market regimes during COVID-19

Model accurately captures significant regime changes

Provides out-of-sample forecasts for market states one year ahead

Abstract

The COVID-19 pandemic has caused severe disruption to economic and financial activity worldwide. We assess what happened to the aggregate U.S. stock market during this period, including implications for both short and long-horizon investors. Using the model of Maheu, McCurdy and Song (2012), we provide smoothed estimates and out-of-sample forecasts associated with stock market dynamics during the pandemic. We identify bull and bear market regimes including their bull correction and bear rally components, demonstrate the model's performance in capturing periods of significant regime change, and provide forecasts that improve risk management and investment decisions. The paper concludes with out-of-sample forecasts of market states one year ahead.