Do stock returns rebound after bear markets? An empirical analysis from five OECD countries

•This paper focuses on the shape of recoveries in financial markets.•Monthly stock returns data are used for five developed countries.•A significant bounce-back effect is found in all countries.•As a consequence, the negative permanent impact of bear markets is notably reduced.

This paper proposes an empirical study of the shape of recoveries in financial markets from a bounce-back augmented Markov Switching model. This model is estimated for monthly stock market returns data of five developed countries for the post-1970 period. The presence and shape of the bounce-back effect are formally tested. Our results show that i) the bounce-back effect is statistically significant and large in all countries, but it is less evident in Germany; and ii) the negative permanent impact of bear markets on the stock price index is notably reduced when the rebound is explicitly taken into account.