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International Sign Predictability of Stock Returns: The Role of the United States

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  • Henri Nyberg

    () (University of Helsinki)

  • Harri Pönkä

    () (University of Helsinki and CREATES)

Abstract

We study the directional predictability of monthly excess stock market returns in the U.S. and ten other markets using univariate and bivariate binary response models. Our main interest is on the potential benefits of predicting the signs of the returns jointly, focusing on the predictive power from the U.S. to foreign markets. We introduce a new bivariate probit model that allows for such a contemporaneous predictive linkage from one market to the other. Our in-sample and out-of-sample forecasting results indicate superior predictive performance of the new model over the competing models by statistical measures and market timing performance, suggesting gradual diffusion of predictive information from the U.S. to the other markets.

Suggested Citation

  • Henri Nyberg & Harri Pönkä, 2015. "International Sign Predictability of Stock Returns: The Role of the United States," CREATES Research Papers 2015-20, Department of Economics and Business Economics, Aarhus University.
  • Handle: RePEc:aah:create:2015-20
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    Cited by:

    1. Pönkä, Harri, 2016. "Real oil prices and the international sign predictability of stock returns," Finance Research Letters, Elsevier, vol. 17(C), pages 79-87.
    2. Becker, Janis & Leschinski, Christian, 2018. "Directional Predictability of Daily Stock Returns," Hannover Economic Papers (HEP) dp-624, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
    3. Harri Pönkä, 2018. "Sentiment and sign predictability of stock returns," Economics Bulletin, AccessEcon, vol. 38(3), pages 1676-1684.
    4. repec:bla:finrev:v:52:y:2017:i:3:p:499-526 is not listed on IDEAS
    5. Antunes, António & Bonfim, Diana & Monteiro, Nuno & Rodrigues, Paulo M.M., 2018. "Forecasting banking crises with dynamic panel probit models," International Journal of Forecasting, Elsevier, vol. 34(2), pages 249-275.
    6. repec:eee:intfin:v:56:y:2018:i:c:p:93-103 is not listed on IDEAS
    7. repec:eee:ememar:v:36:y:2018:i:c:p:159-179 is not listed on IDEAS
    8. repec:wly:jforec:v:37:y:2018:i:1:p:1-15 is not listed on IDEAS
    9. repec:eee:pacfin:v:52:y:2018:i:c:p:70-81 is not listed on IDEAS
    10. repec:eee:riibaf:v:42:y:2017:i:c:p:39-60 is not listed on IDEAS

    More about this item

    Keywords

    Excess stock return; Directional predictability; Bivariate probit model; Market timing;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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