International Stock Return Predictability: What Is the Role of the United States?

Abstract

We present significant evidence of out-of-sample equity premium predictability for a host of industrialized countries over the postwar period. There are important differences, however, in the nature of equity premium predictability between the United States and other developed countries. Taken collectively, U.S. economic variables are significant out-of-sample predictors of the U.S. equity premium that clearly outperform lagged international stock returns. In contrast, lagged international stock returns-especially lagged U.S. returns-substantially outperform economic variables as out-of-sample equity premium predictors for non-U.S. countries, pointing to a leading role for the United States with respect to international return predictability. These predictability patterns are enhanced during economic downturns, linking return predictability to business-cycle fluctuations and information frictions involving the diffusion of news on macroeconomic fundamentals across countries. The leading role of the United States stands out during the recent global financial crisis: lagged U.S. stock returns deliver especially sizable gains for forecasting the monthly equity premium in other countries, evidenced by out-of-sample R 2 statistics of 10% or greater, more than triple the postwar average.JEL classifications: C22, C53, G14, G15, G17

Illiquidity Transmission in a Three-Country Framework: A Conditional Approach

“…Fourth, the relation between returns in stock markets of different countries has largely been analyzed in the literature, resulting in the identification of the leading role of the United States (e.g., Becker et al 1990;Karolyi and Stulz 1996;Eun and Shim 1989;Rapach et al 2013, and based on a theoretical model in Rizova 2010). We confirm the leading role of the U.S. concerning international liquidity transmission.…”

Lead-Lag Relationships in International Stock Markets Revisited: Are They Exploitable?

“…Pooling observations from multiple countries has been advocated in the literature on international return predictability to improve statistical power and forecast performance (Ang and Bekaert (2007), Hjalmarsson (2010), Rapach, Strauss, and Zhou (2013)). (Note 14) The pooled estimates measure the average lead-lag relationship across all countries.…”

“…However, the empirical return predictability literature has shifted its focus in recent years from in-sample tests to out-of-sample tests (e.g. Goyal and Welch (2008), Campbell and Thompson (2008), Rapach, Strauss and Zhou (2013)). We find that lead-lag relationships are robust in out-of-sample tests and could be potentially beneficial for a real-world investor, who attempts to profit from them.…”

Interdependencies and Causalities in Coupled Financial Networks

“…[26][27][28][29][30][31][32][33][34][35][36][37][38][39][40][41]) reporting mixed results, finding positive or negative correlations, stable or non-stable causality relations between markets, and regional and temporal diversity.…”