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. 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.