International Stock Return Predictability: What is the Role of the United States?
- Abstract
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- Author(s): DAVID E. RAPACH, JACK K. STRAUSS, GUOFU ZHOU
- Published: Mar 19, 2013
- DOI: 10.1111/jofi.12041
ABSTRACT
We investigate lead‐lag relationships among monthly country stock returns and identify a leading role for the U.S.: lagged U.S. returns significantly predict returns in numerous non‐U.S. industrialized countries, while lagged non‐U.S. returns display limited predictive ability with respect to U.S. returns. We estimate a news‐diffusion model, and the results indicate that return shocks arising in the U.S. are only fully reflected in equity prices outside of the U.S. with a lag, consistent with a gradual information diffusion explanation of the predictive power of lagged U.S. returns.