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International Evidence for Return Predictability and the Implications for Long-Run Covariation of the G7 Stock Markets

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  • Thomas Nitschka

Abstract

Temporary fluctuations of the US consumption-wealth ratio do not only predict excess returns on the US but also international stock markets at the business cycle frequency. This finding is the reflection of a common, temporary component in national stock markets. Exposure to this common component explains up to 50% of the pairwise covariation among long-horizon returns on the G7 stock markets for the time period from 1970 to 2008. This latter finding is less pronounced in the post-1990s period. Copyright 2010 The Author. German Economic Review 2010 Verein für Socialpolitik.

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Bibliographic Info

Article provided by Verein für Socialpolitik in its journal German Economic Review.

Volume (Year): 11 (2010)
Issue (Month): (November)
Pages: 527-544

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Handle: RePEc:bla:germec:v:11:y:2010:i::p:527-544

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References

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  1. John Y. Campbell, 1995. "Understanding Risk and Return," Harvard Institute of Economic Research Working Papers 1711, Harvard - Institute of Economic Research.
  2. John Heaton & Deborah Lucas, 2000. "Portfolio Choice and Asset Prices: The Importance of Entrepreneurial Risk," Journal of Finance, American Finance Association, vol. 55(3), pages 1163-1198, 06.
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  4. Cochrane, John H., 2005. "Financial Markets and the Real Economy," Foundations and Trends(R) in Finance, now publishers, vol. 1(1), pages 1-101, July.
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  6. Hamburg, Britta & Hoffmann, Mathias & Keller, Joachim, 2005. "Consumption, wealth and business cycles: why is Germany different?," Discussion Paper Series 1: Economic Studies 2005,16, Deutsche Bundesbank, Research Centre.
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  8. Brooks, Robin & Del Negro, Marco, 2004. "The rise in comovement across national stock markets: market integration or IT bubble?," Journal of Empirical Finance, Elsevier, vol. 11(5), pages 659-680, December.
  9. Berben, Robert-Paul & Jansen, W. Jos, 2005. "Comovement in international equity markets: A sectoral view," Journal of International Money and Finance, Elsevier, vol. 24(5), pages 832-857, September.
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  11. Kasa, Kenneth, 1992. "Common stochastic trends in international stock markets," Journal of Monetary Economics, Elsevier, vol. 29(1), pages 95-124, February.
  12. Lance A. Fisher & Graham M. Voss, 2004. "Consumption, Wealth and Expected Stock Returns in Australia," The Economic Record, The Economic Society of Australia, vol. 80(251), pages 359-372, December.
  13. Robin Brooks & Marco Del Negro, 2003. "Firm-level evidence on international stock market movement," Working Paper 2003-8, Federal Reserve Bank of Atlanta.
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Cited by:
  1. Mathias Hoffmann & Thomas Nitschka, 2009. "Securitization of Mortgage Debt, Asset Prices and International Risk Sharing," CESifo Working Paper Series 2527, CESifo Group Munich.
  2. Thomas Nitschka, 2012. "Banking sector's international interconnectedness: Implications for consumption risk sharing in Europe," Working Papers 2012-04, Swiss National Bank.
  3. Thomas Nitschka, 2008. "Idiosyncratic Consumption Risk and Predictability of the Carry Trade Premium: Euro Area Evidence," IEW - Working Papers 387, Institute for Empirical Research in Economics - University of Zurich.
  4. Thomas Nitschka, 2008. "The Risk Premium on the Euro Area Market Portfolio: The Role of Real Estate," IEW - Working Papers 385, Institute for Empirical Research in Economics - University of Zurich.
  5. Thomas Nitschka, 2012. "Global and country-specific business cycle risk in time-varying excess returns on asset markets," Working Papers 2012-10, Swiss National Bank.
  6. Nitschka, Thomas, 2013. "The impact of (global) business cycle risk on the German and British stock markets: Evidence from the first age of globalization," Review of Financial Economics, Elsevier, vol. 22(3), pages 118-124.

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