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

46 Pages Posted: 19 Nov 2009 Last revised: 23 May 2012

See all articles by David Rapach

David Rapach

Saint Louis University; Washington University in St. Louis

Jack Strauss

University of Denver - Reiman School of Finance; University of Denver

Guofu Zhou

Washington University in St. Louis - John M. Olin Business School; China Academy of Financial Research (CAFR)

Multiple version iconThere are 2 versions of this paper

Date Written: May 22, 2012

Abstract

We investigate lead-lag relationships among country stock returns and identify a leading role for the United States: lagged U.S. returns significantly predict returns in numerous non-U.S. industrialized countries (after controlling for national economic variables and countries' own lagged returns), while lagged non-U.S. returns display little predictive ability with respect to U.S. returns. The predictive power of lagged U.S. returns is robust across a number of dimensions, including out-of-sample tests. Information frictions seem a ready explanation of the predictive power of lagged U.S. returns; indeed, structural estimation of a news-diffusion model indicates that return shocks emanating in the United States are only fully reflected in equity prices outside of the United States with a lag. Overall, our results indicate that predictive regressions for non-U.S. countries should be augmented with lagged U.S. returns to capture an important source of international return predictability.

Keywords: Equity premium, Predictive regression model, Combination forecast, Information diffusion, Granger causality, Business cycle, Global financial crisis

JEL Classification: C22, C53, G14, G15, G17

Suggested Citation

Rapach, David and Strauss, Jack and Zhou, Guofu, International Stock Return Predictability: What is the Role of the United States? (May 22, 2012). Journal of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1508484 or http://dx.doi.org/10.2139/ssrn.1508484

David Rapach

Saint Louis University ( email )

3674 Lindell Blvd
St. Louis, MO 63108-3397
United States

HOME PAGE: http://https://sites.google.com/slu.edu/daverapach

Washington University in St. Louis

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

HOME PAGE: http://https://sites.google.com/slu.edu/daverapach

Jack Strauss

University of Denver - Reiman School of Finance ( email )

2101 S. University Blvd
Denver, CO COLORADO 80126
United States
314 602 7265 (Phone)

University of Denver ( email )

2201 S. Gaylord St
Denver, CO 80208-2685
United States

Guofu Zhou (Contact Author)

Washington University in St. Louis - John M. Olin Business School ( email )

Washington University
Campus Box 1133
St. Louis, MO 63130-4899
United States
314-935-6384 (Phone)
314-658-6359 (Fax)

HOME PAGE: http://apps.olin.wustl.edu/faculty/zhou/

China Academy of Financial Research (CAFR)

Shanghai Advanced Institute of Finance
Shanghai P.R.China, 200030
China

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