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International Stock Return Predictability: Is the Role of U.S. Time-Varying?

Goodness Aye (), Mehmet Balcilar () and Rangan Gupta ()
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Goodness Aye: Department of Economics, University of Pretoria

No 201524, Working Papers from University of Pretoria, Department of Economics

Abstract: This study investigates the predictability of 11 industrialized stock returns with emphasis on the role of U.S. returns. Using monthly data spanning 1980:2 to 2014:12, we show that there exist multiple structural breaks and nonlinearities in the data. Therefore, we employ methods that are capable of accounting for these and at the same time date stamping the periods of causal relationship between the U.S. returns and those of the other countries. First we implement a subsample analysis which relies on the set of models, data set and sample range as in Rapach et al. (2013). Our results show that while the U.S. returns played a strong predictive role based on the OLS pairwise Granger causality predictive regression and news-diffusion models, it played no role based on the pooled version of the OLS model and its role based on the adaptive elastic net model is weak relative to Switzerland. Second, we implement our preferred model: a bootstrap rolling window approach using our newly updated data on stock returns for each countries, and find that U.S. stock return has significant predictive ability for all the countries at certain sub-periods. Given these results, it would be misleading to rely on results based on constant-parameter linear models that assume that the relationship between the U.S. returns and those of other industrialized countries are permanent, since the relationship is, in fact, time-varying, and holds only at specific periods.

Keywords: Stock returns; predictability; structural breaks; nonlinearity; time varying causality (search for similar items in EconPapers)
JEL-codes: C32 G10 G15 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2015-04
New Economics Papers: this item is included in nep-for
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Journal Article: International stock return predictability: Is the role of U.S. time-varying? (2017) Downloads
Working Paper: International Stock Return Predictability: Is the Role of U.S. Time-Varying? (2015) Downloads
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