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International Stock Return Predictability: Is the Role of U.S. Time-Varying?

Listed author(s):
  • Goodness C. Aye

    ()

    (Department of Economics, University of Pretoria)

  • Mehmet Balcilar

    ()

    (Department of Economics, Eastern Mediterranean University)

  • Rangan Gupta

    ()

    (Department of Economics, University of Pretoria)

This study investigates the predictability of 11 industrialized stock returns with emphasis on the role of U.S. returns. Using monthly data spanning 1980:2 to 2014:12, we show that there exist multiple structural breaks and nonlinearities in the data. Therefore, we employ methods that are capable of accounting for these and at the same time date stamping the periods of causal relationship between the U.S. returns and those of the other countries. First we implement a subsample analysis which relies on the set of models, data set and sample range as in Rapach et al. (2013). Our results show that while the U.S. returns played a strong predictive role based on the OLS pairwise Granger causality predictive regression and news-diffusion models, it played no role based on the pooled version of the OLS model and its role based on the adaptive elastic net model is weak relative to Switzerland. Second, we implement our preferred model: a bootstrap rolling window approach using our newly updated data on stock returns for each countries, and find that U.S. stock return has significant predictive ability for all the countries at certain sub-periods. Given these results, it would be misleading to rely on results based on constant-parameter linear models that assume that the relationship between the U.S. returns and those of other industrialized countries are permanent, since the relationship is, in fact, time-varying, and holds only at specific periods.

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File URL: http://repec.economics.emu.edu.tr/RePEc/emu/wpaper/15-07.pdf
File Function: First version, 2015
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Paper provided by Eastern Mediterranean University, Department of Economics in its series Working Papers with number 15-07.

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Length: 32 pages
Date of creation: 2015
Handle: RePEc:emu:wpaper:15-07.pdf
Contact details of provider: Phone: 90 (392) 630-1291
Fax: 90 (392) 365-1017
Web page: http://economics.emu.edu.tr/

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