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

41 Pages Posted: 19 Mar 2010

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: March 8, 2010

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, while lagged international stock returns have no predictive power. 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. The evidence thus points to a leading role for the United States with respect to international return predictability and is consistent with information frictions in international equity markets. The predictability patterns are enhanced during economic downturns, linking return predictability to business-cycle fluctuations and 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. returns deliver especially sizable gains for forecasting the monthly equity premium in other countries, evidenced by out-of-sample R-squared statistics of 10% or greater, more than triple the postwar average.

Keywords: Out-of-sample equity premium predictability, Predictive regression model, Combination forecast, Information diffusion, Granger causality, Business cycle, Global financial crisis

JEL Classification: C22, C53, E32, 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? (March 8, 2010). Available at SSRN: https://ssrn.com/abstract=1572946 or http://dx.doi.org/10.2139/ssrn.1572946

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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