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





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    • Rapach and Strauss are with the Saint Louis University John Cook School of Business. Zhou is with the Washington University in St. Louis Olin Business School, CAFR, and CEMA. We are extremely grateful to Andrew Ang (Acting Editor) and two anonymous referees for extensive comments that significantly improved the paper. We also thank Magnus Dahlquist, John Griffin, Campbell Harvey, Satadru Hore, Jack Lu, Pedro Matos, Michael McCracken, Frederico Nadari, Ľuboš Pástor, Georg Strasser, Ivo Welch, Yexaio Xu, and seminar participants at Boston College, Louisiana State University, Virginia Tech, Western Michigan University, the 2009 Midwest Econometric Group Meetings, and the 2009 International Atlantic Economic Conference for very helpful comments. In addition, the authors thank Bryan Taylor for providing information on series from Global Financial Data. The usual disclaimer applies. Rapach and Strauss acknowledge financial support from the Simon Center for Regional Forecasting at Saint Louis University.


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.