International Stock Return Predictability: What Is the Role of the United States?

Abstract

We investigate lead-lag relationships among monthly country stock returns and identify a leading role for the United States: lagged U.S. returns significantly predict returns in numerous non-U.S. industrialized countries, while lagged non-U.S. returns display limited predictive ability with respect to U.S. returns. We estimate a news-diffusion model, and the results indicate that return shocks arising in the United States are only fully reflected in equity prices outside of the United States with a lag, consistent with a gradual information diffusion explanation of the predictive power of lagged U.S. returns.