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This paper examines the dynamic interaction between falling and risingmarkets for both the real and the financial sectors of the largest economy inthe world using asymmetric causality tests. These tests require that eachunderlying variable in the model be transformed into partial sums of thepositive and negative components. The positive components represent the risingmarkets and the negative components embody the falling markets. The sampleperiod covers some part of the COVID19 pandemic. Since the data is non normaland the volatility is time varying, the bootstrap simulations with leverageadjustments are used in order to create reliable critical values when causalitytests are conducted. The results of the asymmetric causality tests disclosethat the bear markets are causing the recessions as well as the bull marketsare causing the economic expansions. The causal effect of bull markets oneconomic expansions is higher compared to the causal effect of bear markets oneconomic recessions. In addition, it is found that economic expansions causebull markets but recessions do not cause bear markets. Thus, the policies thatremedy the falling financial markets can also help the economy when it is in arecession.

Bear Markets and Recessions versus Bull Markets and Expansions