International Stock Return Predictability: On the Role of the United States in Bad and Good Times

In this paper we document the asymmetric role that the U.S. stock market plays in the international predictability of excess stock returns during recession and expansion periods. Most of the positive evidence accrues during the periods of recessions in the United States. During the expansions there is only a limited evidence supporting the importance of lagged U.S. returns in predictability of stock returns in 10 industrialised countries. The methodology is the based on the use of predictive regressions for forecasting excess stock returns in 10 industrialised countries. The accuracy of forecasting exercise are evaluated by means of the test of Clark and West (2007) and the recursive measure of the out-of-sample forecasting performance suggested in Welch and Goyal (2008). In this paper we document the asymmetric role that the U.S. stock market plays in the international predictability of excess stock returns during recession and expansion periods. Most of the positive evidence accrues during the periods of recessions in the United States. During the expansions there is only a limited evidence supporting the importance of lagged U.S. returns in predictability of stock returns in 10 industrialised countries.