Stock Return Predictability and Global Stock Market Integration
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We examine the predictive power of the financial and macroeconomic variable for forecasting aggregate stock market returns on Korean, UK, and US equity portfolio to study the integration of long-term capital markets in these three countries. Short rates strongly predict returns in Korea, UK and US. Dividend yields help to predict stock returns in US. Results indicate that short rates together with dividend yields have some predictive power on the stock market. Nevertheless, explanatory power of the variables remains very weak. Those tend to bee consist with the efficient market hypothesis. In addition, US related variables help to predict Korean and UK stock returns. UK related variables help to predict US stock market returns, either. The movements in the Korean stock market do not help to predict UK or US stock market. The two markets show some co-movements in the short run while Korean market is rather independent of foreign markets. There are some evidences of common movement in expected market returns among the three countries and of long-run equilibrium relationships through error correction. Those are suggestive of integration of capital markets in the long horizon. Those relationships are more pronounced in 2000s, indicating that the speed of adjustments toward long-run equilibrium is accelerated recently.
Abstract
We examine the predictive power of the financial and macroeconomic variable for forecasting aggregate stock market returns on Korean, UK, and US equity portfolio to study the integration of long-term capital markets in these three countries. Short rates strongly predict returns in Korea, UK and US. Dividend yields help to predict stock returns in US. Results indicate that short rates together with dividend yields have some predictive power on the stock market. Nevertheless, explanatory power of the variables remains very weak. Those tend to bee consist with the efficient market hypothesis. In addition, US related variables help to predict Korean and UK stock returns. UK related variables help to predict US stock market returns, either. The movements in the Korean stock market do not help to predict UK or US stock market. The two markets show some co-movements in the short run while Korean market is rather independent of foreign markets. There are some evidences of common movement in expected market returns among the three countries and of long-run equilibrium relationships through error correction. Those are suggestive of integration of capital markets in the long horizon. Those relationships are more pronounced in 2000s, indicating that the speed of adjustments toward long-run equilibrium is accelerated recently.
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