Bear (Investor) - Explained
What is a Bear Investor?
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Table of ContentsWhat is a Bear (Investor)?What does a Bear Investor Do?Bear BehaviorsFamous BearsAcademics Research on Bear
What is a Bear (Investor)?
A bear is a term used for an investor who aims to be in a profitable position with a fall in stock prices in the market. Bears are usually considered to be pessimistic regarding a specific market condition. For instance, if an investor followed the bearish approach for the famous S&P 500, he or she would try to gain profit from a fall in this particular index.
What does a Bear Investor Do?
An investor can act bearish in commodity market, bond market, and stock market. The stock market comprises of trade activities taking place between bears and their counterparts, bulls who are optimistic about stock prices. In the last century, the stock market of the United States has grown by 10% per annum on an average. This data informs that each bear who has traded in the long-term market has ended up losing money.
As mentioned above, bears are pessimistic about the movement of the stock market. They use several strategies for gaining profits with a fall in the market, and incurring losses when the stock prices shoot up. Short selling is the most popular strategy that bears use. It is the reverse of conventional approach that asks to buy at low, and sell at high price. In short selling, sellers tend to buy low and sell high, but in the inverse pattern, meaning selling high first, and then buying low with a hope that there is a fall in the prices. In order to carry short selling, the investor can borrow shares from an intermediary, and further sell them in the market. Once he or she has made the sale, and received proceeds from it, the short seller still needs to pay back to the intermediary for the number of shares borrowed. Here, the objective is to restore them for a longer period, and a lesser price, so as to keep the difference as margin or profit. Short selling involves more risks than traditional investments. In traditional investments, the stock price can only reduce to zero. This means that the investor would only lose the money he or she made investment for. However, in short selling, there is no limit of losses that a short seller can lose owing to an unlimited increase in price.
There are many affluent investors who are globally known for holding a bearish sentiment in the stock market. Peter Schiff, a famous Wall Street investor, is known as a typical bear. He is a stockbroker and has written many investment-based books. He shows a sheer pessimism on stocks, and gives more preference to the ones holding intrinsic value such as commodities and gold. Back in August 2006, he referred to the U.S. economy as the great movie Titanic. And, he received appreciation for analyzing and giving predictions about the Great Recession (from 2007 to 2009). In his career, he has predicted many prospective scenarios in the stock market which never appeared to be true in reality.
Academics Research on Bear
- Identifying bull andbear marketsinstockreturns, Maheu, J. M., & McCurdy, T. H. (2000). Identifying bull and bear markets in stock returns.Journal of Business & Economic Statistics,18(1), 100-112. This article uses a Markov-switching model that incorporates duration dependence to capture nonlinear structure in both the conditional mean and the conditional variance of stock returns. The model sorts returns into a high-return stable state and a low-return volatile state. We label these as bull and bear markets, respectively. The filter identifies all major stock-market downturns in over 160 years of monthly data. Bull markets have a declining hazard functions although the best market gains come at the start of a bull market. Volatility increases with duration in bear markets. Allowing volatility to vary with duration captures volatility clustering.
- Predicting thebear stock market: Macroeconomic variables as leading indicators, Chen, S. S. (2009). Predicting the bear stock market: Macroeconomic variables as leading indicators.Journal of Banking & Finance,33(2), 211-223. This paper investigates whether macroeconomic variables can predict recessions in the stock market, i.e., bear markets. Series such as interest rate spreads, inflation rates, money stocks, aggregate output, unemployment rates, federal funds rates, federal government debt, and nominal exchange rates are evaluated. After using parametric and nonparametric approaches to identify recession periods in the stock market, we consider both in-sample and out-of-sample tests of the variables predictive ability. Empirical evidence from monthly data on the Standard & Poors S&P 500 price index suggests that among the macroeconomic variables we have evaluated, yield curve spreads and inflation rates are the most useful predictors of recessions in the US stock market, according to both in-sample and out-of-sample forecasting performance. Moreover, comparing the bear market prediction to the stock return predictability has shown that it is easier to predict bear markets using macroeconomic variables.
- Duration dependence instockprices: An analysis of bull andbear markets, Lunde, A., & Timmermann, A. (2004). Duration dependence in stock prices: An analysis of bull and bear markets.Journal of Business & Economic Statistics,22(3), 253-273. This article studies time series dependence in the direction of stock prices by modeling 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 generalized autoregressive conditional heteroscedasticity 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 likelihood of continued declines in stock prices.
- Increased correlation inbear markets, Campbell, R., Koedijk, K., & Kofman, P. (2002). Increased correlation in bear markets.Financial Analysts Journal,58(1), 87-94. A number of studies have provided evidence of increased correlations in global financial market returns during bear markets. Other studies, however, have shown that some of this evidence may be biased. We derive an alternative to previous estimators for implied correlation that is based on measures of portfolio downside risk and that does not suffer from bias. The unbiased quantile correlation estimates are directly applicable to portfolio optimization and to risk management techniques in general. This simple and practical method captures the increasing correlation in extreme market conditions while providing a pragmatic approach to understanding correlation structure in multivariate return distributions. Based on data for international equity markets, we found evidence of significant increased correlation in international equity returns in bear markets. This finding proves the importance of providing a tail-adjusted meanvariance covariance matrix.
- The Asymmetry Information Effect on Bull andBear Stock Markets, Rong, L., & Longbing, X. (2004). The Asymmetry Information Effect on Bull and Bear Stock Markets.Economic Research Journal,3, P65-72. Good news and bad news have asymmetry effects on stock markets, which is important in asset pricing, portfolio and risk control. While the fact that different effects could occur in different stages are always neglected. The information effect on China's stock markets is different from that on foreign stock markets. We divide China's stock markets into bull and bear markets and detect the information effect in different stages using exponential ARCH (EGARCH) models. We then discuss the reason of the special impact from the point of investor's expectation, structure, and the market microstructure. Finally, we point out several problems for further research.