An Anatomy of the Predictability of International Stock Returns

This paper gives a better understanding of the lead-lag relationships in the international stock return market. Firstly, we reproduce the outcomes of Rapach et al. (2013) and also conclude that there is a significant predictive ability between countries. Similar to Rapach et al. (2013), we find that the most dominant predictors for international excess returns are the United States’ excess returns. Secondly, we further investigate the predictive ability, by examining the predictive ability of positive and negative lagged excess returns, lagged excess returns in months of high and low volatility, and the predictive ability of lagged excess returns during U.S. recession or U.S. economic growth. We conclude that the general predictive ability of positive and negative lagged excess returns is equal, but differs for specific countries. When making a distinction between the predictive ability of lagged excess returns in months of high and low volatility, we conclude that the months with high volatility have more predictive ability. Furthermore, we see that the lagged United States’ excess returns in times of U.S. Recessions have more predictive ability than the lagged excess returns during American economic growth.