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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 U.S. consumption-wealth ratio, cay, predict excess returns on 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 60 percent of the covariation among long-horizon returns on the G7 stock markets for the time period from 1973 to 2005. The impact of the common component on stock market comovement is particularly pronounced in the period from 1990 to 2005.

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  • Thomas Nitschka, 2007. "International evidence for return predictability and the implications for long-run covariation of the G7 stock markets," IEW - Working Papers 338, Institute for Empirical Research in Economics - University of Zurich.
    • Handle: RePEc:zur:iewwpx:338
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    Cited by:

    1. Shi, Huai-Long & Zhou, Wei-Xing, 2017. "Time series momentum and contrarian effects in the Chinese stock market," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 483(C), pages 309-318.
    2. Choi, Gahyun & Park, Kwangyeol & Yi, Eojin & Ahn, Kwangwon, 2023. "Price fairness: Clean energy stocks and the overall market," Chaos, Solitons & Fractals, Elsevier, vol. 168(C).
    3. Castro, Andressa Monteiro de & Issler, João Victor, 2016. "Consumption-Wealth Ratio and Expected Stock Returns: Evidence from Panel Data on G7 Countries," Revista Brasileira de Economia - RBE, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil), vol. 70(4), December.
    4. Dr. 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.
    5. Thomas Nitschka, 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, John Wiley & Sons, vol. 22(3), pages 118-124, September.
    6. Khurshid M. Kiani, 2016. "On Modelling and Forecasting Predictable Components in European Stock Markets," Computational Economics, Springer;Society for Computational Economics, vol. 48(3), pages 487-502, October.
    7. Mathias Hoffmann & Thomas Nitschka, 2008. "Securitization of Mortgage Debt, Asset Prices and International Risk Sharing," IEW - Working Papers 376, Institute for Empirical Research in Economics - University of Zurich.
    8. Nitschka, Thomas, 2011. "Banking sectors' international interconnectedness: Implications for consumption risk sharing in Europe," VfS Annual Conference 2011 (Frankfurt, Main): The Order of the World Economy - Lessons from the Crisis 48684, Verein für Socialpolitik / German Economic Association.
    9. Shi, Huai-Long & Zhou, Wei-Xing, 2017. "Wax and wane of the cross-sectional momentum and contrarian effects: Evidence from the Chinese stock markets," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 486(C), pages 397-407.
    10. Nitschka, Thomas, 2010. "Cashflow news, the value premium and an asset pricing view on European stock market integration," Journal of International Money and Finance, Elsevier, vol. 29(7), pages 1406-1423, November.
    11. Nitschka, Thomas, 2010. "Securitization, collateral constraints and consumption risk sharing in the euro area," Economics Letters, Elsevier, vol. 106(3), pages 197-199, March.
    12. Su, Xianfang, 2020. "Measuring extreme risk spillovers across international stock markets: A quantile variance decomposition analysis," The North American Journal of Economics and Finance, Elsevier, vol. 51(C).
    13. Su, Xianfang, 2020. "Dynamic behaviors and contributing factors of volatility spillovers across G7 stock markets," The North American Journal of Economics and Finance, Elsevier, vol. 53(C).
    14. Alain Galli, 2017. "How Reliable are Cointegration-Based Estimates for Wealth Effects on Consumption? Evidence from Switzerland," Swiss Journal of Economics and Statistics, Springer;Swiss Society of Economics and Statistics, vol. 153(4), pages 437-479, October.
    15. Thomas Nitschka, 2010. "Idiosyncratic consumption risk and predictability of the carry trade premium: Euro-Area evidence," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 24(1), pages 49-65, March.
    16. Nitschka, Thomas, 2014. "Developed markets’ business cycle dynamics and time-variation in emerging markets’ asset returns," Journal of Banking & Finance, Elsevier, vol. 42(C), pages 76-82.
    17. Nitschka, Thomas, 2011. "About the soundness of the US-cay indicator for predicting international banking crises," The North American Journal of Economics and Finance, Elsevier, vol. 22(3), pages 237-256.
    18. 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.

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    More about this item

    Keywords

    U.S. consumption-wealth ratio; stock market comovement; stock return predictability;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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