■ Cyclicality in Stock Market Volatility and Optimal Portfolio Allocation
In Table 10.1, we show the U.S equity market volatility in an average bull market versus an average bear market. We use a classic bull/bear market definition, where a bull market is defined as a period of general price appreciation, during which the cumulative market return exceeds 20%. A bear market, by contrast, is a period of price decline, during which the cumulative market negative return exceeds –20%. For simplicity, the market is classified to be in either a bull or bear market phase. Additionally, we show the volatility of other mainstream asset classes over the same equity market cycles. Furthermore, to illustrate the robustness of the finding, we also show, in Table 10.2, the volatilities of these asset classes in different phases of the business cycle (expansion versus recession). We employ the National Bureau of Economic Research (NBER) definitions for expansions and recessions, which uses GDP growth/decline and other macroeconomic factors to classify business cycles.