| Summary: | Optimal prediction model of cyclical downturns proposed by Neftci (1982) was widely used in application to predict turning points of different economies such as US, UK, Japan, and West Germany. I apply Neftci model to predict the occurrence of bear markets of Taiwan stock market by using exchange rate of NTD, monitoring indicator of economy, and turnover rate of TAIEX as predictors. The results show that turnover rate outperforms the other two predictors, which signaled bear markets almost concurrently on average and the variation of the signal time is the smallest, ranging from 4 months lead to 4 months lag. === Optimal prediction model of cyclical downturns proposed by Neftci (1982) was widely used in application to predict turning points of different economies such as US, UK, Japan, and West Germany. I apply Neftci model to predict the occurrence of bear markets of Taiwan stock market by using exchange rate of NTD, monitoring indicator of economy, and turnover rate of TAIEX as predictors. The results show that turnover rate outperforms the other two predictors, which signaled bear markets almost concurrently on average and the variation of the signal time is the smallest, ranging from 4 months lead to 4 months lag.
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