Historical Relationships and International Market Return Predictability: The Role of the UK in the Former British Colonies, Protectorates and Mandates

Takuro Hidaka, Yuta Saito and Jun Sakamoto
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Takuro Hidaka: Department of Economics, Rikkyo University
Jun Sakamoto: Department of Economics, Osaka Gakuin University

No 21-08-Rev., Discussion Papers in Economics and Business from Osaka University, Graduate School of Economics

Abstract: This study demonstrates that lagged UK stock returns predict stock returns in emerging markets that were previously colonies, protectorates, and mandates (CPMs). First, we evaluate the predictive power of lagged market returns from various advanced countries for the former CPMs. The results show that the UK ’s lagged market returns have the highest predictive power. We then examine the performance of investment strategies that use the returns of advanced countries as predictors. We find that a strategy that uses UK returns significantly outperforms those that use returns from other advanced countries as predictors. We also analyze a model that includes a dummy variable for recessions. The results show that the strategy using UK returns is the best for terminal wealth, while the strategy using U.S. returns is the best for the Sharp ratio. These findings suggest that lagged UK returns have strong predictive power for former CPMs in normal times, while lagged U.S. returns are better predictors during recessions.

Keywords: Return predictability; Emerging market; Investment strategy (search for similar items in EconPapers)
JEL-codes: G11 G15 G17 (search for similar items in EconPapers)
Pages: 21pages
Date: 2021-06, Revised 2023-10
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