Predictable Stock Returns in the United States and Japan: A Study of Long-Term Capital Market Integration




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    • From the Woodrow Wilson School, Princeton University and NBER and the Graduate School of Business, Columbia University, respectively. This research has been supported by the National Science Foundation and the John M. Olin Fellowship at the NBER (Campbell); and the Dean Witter Foundation and the Batterymarch Fellowship (Hamao). We are grateful to Daniel Hardy and Ludger Hentschel for able research assistance, to Daiwa Securities for providing some of the data, and to Jacob Boudoukh, Wayne Ferson, Kenneth Singleton, Renϩ Stulz, anonymous referees, and participants in the 1990 Western Finance Association meetings for helpful comments on earlier drafts of the paper.


This paper uses the predictability of monthly excess returns on U.S. and Japanese equity portfolios over the U.S. Treasury bill rate to study the integration of long-term capital markets in these two countries. During the period 1971–1990 similar variables, including the dividend-price ratio and interest rate variables, help to forecast excess returns in each country. In addition, in the 1980's U.S. variables help to forecast excess Japanese stock returns. There is some evidence of common movement in expected excess returns across the two countries, which is suggestive of integration of long-term capital markets.