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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
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    References listed on IDEAS

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    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

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