Does the U.S. extreme indicator matter in stock markets? International evidence

Xiaozhen Jing (), Dezhong Xu (), Bin Li () and Tarlok Singh ()
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Xiaozhen Jing: Griffith University
Dezhong Xu: Griffith University
Bin Li: Griffith University
Tarlok Singh: Griffith University

Financial Innovation, 2024, vol. 10, issue 1, 1-27

Abstract: Abstract We propose a new predictor—the innovation in the daily return minimum in the U.S. stock market ( $$\Delta {MIN}^{US}$$ Δ MIN US )—for predicting international stock market returns. Using monthly data for a wide range of 17 MSCI international stock markets during the period spanning over half a century from January 1972 to July 2022, we find that $$\Delta {MIN}^{US}$$ Δ MIN US have strong predictive power for returns in most international stock markets: $$\Delta {MIN}^{US}$$ Δ MIN US negatively predicts the next-month stock market returns. The results remain robust after controlling for a number of macroeconomic predictors and conducting subsample and panel data analyses, indicating that $$\Delta {MIN}^{US}$$ Δ MIN US has significant predictive power and it outperforms other variables in international markets. Notably, $$\Delta {MIN}^{US}$$ Δ MIN US demonstrates excellent predictive power even during the periods driven by financial upheavals (e.g., Global Financial Crisis and European Sovereign Debt Crisis). Both panel regressions and out-of-sample tests also support the robust predictive performance of $$\Delta {MIN}^{US}$$ Δ MIN US . The predictive power, however, disappears during the non-financial crisis caused by COVID-19 pandemic, which is originated from the health sector rather than the financial sector. The results provide a new perspective on U.S. extreme indicator in stock market return predictability.

Keywords: Return predictability; Innovation in extreme minimum; International stock markets; Financial crisis (search for similar items in EconPapers)
JEL-codes: C53 G12 G15 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1186/s40854-024-00610-w

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