IDEAS home Printed from https://ideas.repec.org/p/osk/wpaper/2108r.html
   My bibliography  Save this paper

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

Author

Listed:
  • Takuro Hidaka

    (Department of Economics, Rikkyo University)

  • Yuta Saito

    (Faculty of Economics and Business, Hokkaido University)

  • Jun Sakamoto

    (Department of Economics, Osaka Gakuin University)

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.

Suggested Citation

  • Takuro Hidaka & Yuta Saito & Jun Sakamoto, 2021. "Historical Relationships and International Market Return Predictability: The Role of the UK in the Former British Colonies, Protectorates and Mandates," Discussion Papers in Economics and Business 21-08-Rev., Osaka University, Graduate School of Economics, revised Oct 2023.
    • Handle: RePEc:osk:wpaper:2108r
    as

    Download full text from publisher

    File URL: http://www2.econ.osaka-u.ac.jp/econ_society/dp/2108R.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Ben Jacobsen & Ben R. Marshall & Nuttawat Visaltanachoti, 2019. "Stock Market Predictability and Industrial Metal Returns," Management Science, INFORMS, vol. 65(7), pages 3026-3042, July.
    2. Ivo Welch & Amit Goyal, 2008. "A Comprehensive Look at The Empirical Performance of Equity Premium Prediction," The Review of Financial Studies, Society for Financial Studies, vol. 21(4), pages 1455-1508, July.
    3. Andrew Ang & Geert Bekaert, 2007. "Stock Return Predictability: Is it There?," The Review of Financial Studies, Society for Financial Studies, vol. 20(3), pages 651-707.
    4. Lucey, Brian M. & Zhang, QiYu, 2010. "Does cultural distance matter in international stock market comovement? Evidence from emerging economies around the world," Emerging Markets Review, Elsevier, vol. 11(1), pages 62-78, March.
    5. Harvey, Campbell R, 1995. "Predictable Risk and Returns in Emerging Markets," The Review of Financial Studies, Society for Financial Studies, vol. 8(3), pages 773-816.
    6. Bannigidadmath, Deepa & Narayan, Paresh Kumar, 2016. "Stock return predictability and determinants of predictability and profits," Emerging Markets Review, Elsevier, vol. 26(C), pages 153-173.
    7. Rahman, Md. Lutfur & Lee, Doowon & Shamsuddin, Abul, 2017. "Time-varying return predictability in South Asian equity markets," International Review of Economics & Finance, Elsevier, vol. 48(C), pages 179-200.
    8. Boriss Siliverstovs, 2017. "International stock return predictability: on the role of the United States in bad and good times," Applied Economics Letters, Taylor & Francis Journals, vol. 24(11), pages 771-773, June.
    9. Jones, Geoffrey, 2000. "Merchants to Multinationals: British Trading Companies in the 19th and 20th Centuries," OUP Catalogue, Oxford University Press, number 9780198294504.
    10. Masih, Abul M. M. & Masih, Rumi, 1999. "Are Asian stock market fluctuations due mainly to intra-regional contagion effects? Evidence based on Asian emerging stock markets," Pacific-Basin Finance Journal, Elsevier, vol. 7(3-4), pages 251-282, August.
    11. Daron Acemoglu & Simon Johnson & James A. Robinson, 2001. "The Colonial Origins of Comparative Development: An Empirical Investigation," American Economic Review, American Economic Association, vol. 91(5), pages 1369-1401, December.
    12. Portes, Richard & Rey, Helene, 2005. "The determinants of cross-border equity flows," Journal of International Economics, Elsevier, vol. 65(2), pages 269-296, March.
    13. Yi-Chieh Wen & Bin Li, 2020. "Lagged country returns and international stock return predictability during business cycle recession periods," Applied Economics, Taylor & Francis Journals, vol. 52(46), pages 5005-5019, October.
    14. Thomas J Flavin & Margaret J Hurley & Fabrice Rousseau, 2002. "Explaining Stock Market Correlation: A Gravity Model Approach," Manchester School, University of Manchester, vol. 70(S1), pages 87-106.
    15. Campbell, John Y. & Viceira, Luis M., 2002. "Strategic Asset Allocation: Portfolio Choice for Long-Term Investors," OUP Catalogue, Oxford University Press, number 9780198296942.
    16. David E. Rapach & Jack K. Strauss & Guofu Zhou, 2013. "International Stock Return Predictability: What Is the Role of the United States?," Journal of Finance, American Finance Association, vol. 68(4), pages 1633-1662, August.
    17. Laszlo Tihanyi & David A Griffith & Craig J Russell, 2005. "The effect of cultural distance on entry mode choice, international diversification, and MNE performance: a meta-analysis," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 36(3), pages 270-283, May.
    18. John Y. Campbell & Samuel B. Thompson, 2008. "Predicting Excess Stock Returns Out of Sample: Can Anything Beat the Historical Average?," The Review of Financial Studies, Society for Financial Studies, vol. 21(4), pages 1509-1531, July.
    19. Wang, Yudong & Pan, Zhiyuan & Liu, Li & Wu, Chongfeng, 2019. "Oil price increases and the predictability of equity premium," Journal of Banking & Finance, Elsevier, vol. 102(C), pages 43-58.
    20. Angela J. Black & Olga Klinkowska & David G. McMillan & Fiona J. McMillan, 2014. "Forecasting Stock Returns: Do Commodity Prices Help?," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 33(8), pages 627-639, December.
    21. Flavin, Thomas J & Hurley, Margaret J & Rousseau, Fabrice, 2002. "Explaining Stock Market Correlation: A Gravity Model Approach," Manchester School, University of Manchester, vol. 70(0), pages 87-106, Supplemen.
    22. Joe Appiah‐Kusi & Kojo Menyah, 2003. "Return predictability in African stock markets," Review of Financial Economics, John Wiley & Sons, vol. 12(3), pages 247-270.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Takuro Hidaka & Jun Sakamoto, 2021. "Predictability of market returns for the UK's former colonies, protectorates, and mandates," Discussion Papers in Economics and Business 21-08, Osaka University, Graduate School of Economics.
    2. Li, Xiyang & Chen, Xiaoyue & Li, Bin & Singh, Tarlok & Shi, Kan, 2022. "Predictability of stock market returns: New evidence from developed and developing countries," Global Finance Journal, Elsevier, vol. 54(C).
    3. Mengxi He & Yudong Wang & Yaojie Zhang, 2023. "The predictability of iron ore futures prices: A product‐material lead–lag effect," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 43(9), pages 1289-1304, September.
    4. Atanasov, Victoria, 2018. "World output gap and global stock returns," Journal of Empirical Finance, Elsevier, vol. 48(C), pages 181-197.
    5. Aggarwal, Raj & Kearney, Colm & Lucey, Brian, 2012. "Gravity and culture in foreign portfolio investment," Journal of Banking & Finance, Elsevier, vol. 36(2), pages 525-538.
    6. Iyke, Bernard Njindan & Ho, Sin-Yu, 2021. "Stock return predictability over four centuries: The role of commodity returns," Finance Research Letters, Elsevier, vol. 40(C).
    7. Spierdijk, Laura & Umar, Zaghum, 2014. "Stocks for the long run? Evidence from emerging markets," Journal of International Money and Finance, Elsevier, vol. 47(C), pages 217-238.
    8. Nonejad, Nima, 2021. "Predicting equity premium using news-based economic policy uncertainty: Not all uncertainty changes are equally important," International Review of Financial Analysis, Elsevier, vol. 77(C).
    9. Nonejad, Nima, 2021. "Predicting equity premium using dynamic model averaging. Does the state–space representation matter?," The North American Journal of Economics and Finance, Elsevier, vol. 57(C).
    10. Lawrenz, Jochen & Zorn, Josef, 2017. "Predicting international stock returns with conditional price-to-fundamental ratios," Journal of Empirical Finance, Elsevier, vol. 43(C), pages 159-184.
    11. Wen, Danyan & Liu, Li & Wang, Yudong & Zhang, Yaojie, 2022. "Forecasting crude oil market returns: Enhanced moving average technical indicators," Resources Policy, Elsevier, vol. 76(C).
    12. David Haab & Dr. Thomas Nitschka, 2017. "Predicting returns on asset markets of a small, open economy and the influence of global risks," Working Papers 2017-14, Swiss National Bank.
    13. Gagnon, Marie-Hélène & Power, Gabriel J. & Toupin, Dominique, 2023. "The sum of all fears: Forecasting international returns using option-implied risk measures," Journal of Banking & Finance, Elsevier, vol. 146(C).
    14. Goodness C. Aye & Mehmet Balcilar & Rangan Gupta, 2017. "International stock return predictability: Is the role of U.S. time-varying?," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 44(1), pages 121-146, February.
    15. Charles, Amelie & Darne, Olivier & Kim, Jae, 2016. "Stock Return Predictability: Evaluation based on Prediction Intervals," MPRA Paper 70143, University Library of Munich, Germany.
    16. Irena Vodenska & Alexander P. Becker & Di Zhou & Dror Y. Kenett & H. Eugene Stanley & Shlomo Havlin, 2016. "Community Analysis of Global Financial Markets," Risks, MDPI, vol. 4(2), pages 1-15, May.
    17. Gonçalo Faria & Fabio Verona, 2016. "Forecasting the equity risk premium with frequency-decomposed predictors," Working Papers de Economia (Economics Working Papers) 06, Católica Porto Business School, Universidade Católica Portuguesa.
    18. , & Stein, Tobias, 2021. "Equity premium predictability over the business cycle," CEPR Discussion Papers 16357, C.E.P.R. Discussion Papers.
    19. Hollstein, Fabian & Nguyen, Duc Binh Benno & Prokopczuk, Marcel & Wese Simen, Chardin, 2019. "International tail risk and World Fear," Journal of International Money and Finance, Elsevier, vol. 93(C), pages 244-259.
    20. Huang, Yisu & Ma, Feng & Bouri, Elie & Huang, Dengshi, 2023. "A comprehensive investigation on the predictive power of economic policy uncertainty from non-U.S. countries for U.S. stock market returns," International Review of Financial Analysis, Elsevier, vol. 87(C).

    More about this item

    Keywords

    Return predictability; Emerging market; Investment strategy;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:osk:wpaper:2108r. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: The Economic Society of Osaka University (email available below). General contact details of provider: https://edirc.repec.org/data/feosujp.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.