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Duration Dependence in Stock Prices:
An Analysis of Bull and Bear Markets
Department of Information Science,
The Aarhus School of Business, Fuglesangs All ´e 4, DK-8210 Aarhus V, Denmark
Department of Economics, University of California, San Diego,
9500 Gilman Drive La Jolla, CA 92093-0508, USA

This paper studies time series dependence in the direction of stock prices by modelling the (instantaneous)
probability that a bull or bear market terminates as a function of its age and a set of underlying state
variables such as interest rates. A random walk model is rejected both for bull and bear markets. Although
it fits the data better, a GARCH model is also found to be inconsistent with the very long bull markets observed
in the data. The strongest effect of increasing interest rates is found to be a lower bear market hazard
rate and hence a higher chance of continued declines in stock prices.

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