Abstract

The goal of this work is to study the synchronization of the relationship between bearish stock market fluctuations and periods of economic recession in six developed countries during the period from February 1990 to May 2013.

Hence, first, we have identified cyclical fluctuations of the real economy and stock market by means of an autoregressive Markov regime-switching model, in order to distinguish between boom-bust cycles of economic activity and of the stock market for each country in our sample.

Second, we have tested the degree of synchronization between economic activity and stock market bust cycles by means of the concordance index. Our results confirm the existence of a strong degree of synchronization between bearish stock market periods and periods of economic depression for most countries in our studied sample. Indeed, our results suggest that bearish stock market cycles precede an average of four months before economic recession cycles.

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