Stock Return Predictability and Market Integration: The Role of Global and Local Information

30 Pages Posted: 19 Nov 2015

Date Written: November 17, 2015

Abstract

This paper examines the predictability of a range of international stock markets where we allow the presence of both local and global predictive factors. Recent research has argued that US returns have predictive power for international stock returns. We expand this line of research, following work on market integration, to include a more general definition of the global factor, based on principal components analysis. Results identify three global expected returns factors, one related to the major stock markets of the US, UK and Asia and one related to the other markets analysed. The third component is related to dividend growth. A single dominant realised returns factor is also noted. A forecasting exercise comparing the principal components based factors to a US return factor and local market only factors, as well as the historical mean benchmark find supportive evidence for the former approach. It is hoped that the results from this paper will be informative on three counts. First, to academics interested in understanding the dynamics asset price movement. Second, to market participants who aim to time the market and engage in portfolio and risk management. Third, to those (policy makers and others) who are interested in linkages across international markets and the nature and degree of integration.

Keywords: Stock Returns, Predictability, Global Information, Principal Components, Forecasting

JEL Classification: C22, G12

Suggested Citation

McMillan, David G., Stock Return Predictability and Market Integration: The Role of Global and Local Information (November 17, 2015). Available at SSRN: https://ssrn.com/abstract=2692084 or http://dx.doi.org/10.2139/ssrn.2692084

David G. McMillan (Contact Author)

University of Stirling ( email )

Stirling, Scotland FK9 4LA
United Kingdom

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