Search results

The latest financial crisis marks a milestone in the development of financial markets. It was a period when it was possible to observe a booming development in the stock markets.

Faced with such a phenomenon, theorists have agreed on the need to resume the debate on the validity of the predictability of stock market returns, which is considered to be the cornerstone of all financial theories. The purpose of this article is to examine the predictability of the bearish stock market using a number of variables widely used in forecasting stock returns. In particular, we focus on variables related to imperfect credit markets.

We revisit the predictability of the bearish market using variables that measure the External Funding Premium (EFP), such as the Default Yield Spread.As the EFP is the key indicator of the extent of credit market imperfections, it should therefore be linked to stock market dynamics and provide useful predictive content.