Stock return predictability and market integration: The role of global and local information

Figures & data

Table 1. Benchmark predictive regression

Country	Div-price	Return	Adj R^2
Australia	0.034^*	0.100^*	0.018
	(2.48)	(2.59)
Austria	0.006	0.286^*	0.075
	(0.63)	(3.24)
Belgium	0.003	0.200^*	0.035
	(0.56)	(3.43)
Canada	0.004	0.086^***	0.004
	(0.58)	(1.68)
Denmark	0.006	0.156^*	0.022
	(0.89)	(2.78)
France	0.014	0.11^*	0.011
	(1.61)	(2.56)
Germany	0.003	0.101^**	0.006
	(0.36)	(2.08)
Hong Kong	0.052^*	0.119^*	0.034
	(3.10)	(2.75)
Ireland	0.008	0.184^*	0.032
	(1.32)	(4.39)
Italy	−0.003	0.108^*	0.009
	(−0.28)	(2.43)
Japan	0.004	0.117^**	0.011
	(0.92)	(2.33)
Netherlands	0.005	0.125^***	0.012
	(0.81)	(1.90)
Singapore	0.037^*	0.150^*	0.034
	(2.46)	(2.72)
Switzerland	0.001	0.169^*	0.024
	(0.15)	(3.77)
UK	0.030^**	0.119^*	0.029
	(2.07)	(2.40)
US	0.006	0.057	0.003
	(1.45)	(1.05)

Note: Entries are coefficient values with Newey–West t-statistics from the predictive regression in Equation (1), given by $r_t=\mathit{\alpha }+\mathit{\beta }\left(d_{t-1}-p_{t-1}\right)+\mathit{\rho }{r}_{t-1}+{\mathit{\epsilon }}_t$.

^* Level of significance at 1%.

^** Level of significance at 5%.

^*** Level of significance at 10%.

Table 2. Predictive regression with lagged US returns

Country	Div-price	Return	US Return	Adj R^2
Australia	0.030^**	0.007	0.198^*	0.032
	(2.26)	(0.17)	(3.30)
Austria	0.006	0.250^*	0.106	0.079
	(0.66)	(2.38)	(1.52)
Belgium	0.004	0.139^**	0.108^**	0.039
	(0.62)	(2.23)	(1.97)
Canada	0.004	−0.054	0.179^*	0.015
	(0.49)	(−0.68)	(2.40)
Denmark	0.006	0.156^*	0.037	0.025
	(0.93)	(2.43)	(0.45)
France	0.013	0.045	0.132^***	0.015
	(1.56)	(0.74)	(1.73)
Germany	0.003	−0.005	0.195^*	0.022
	(0.47)	(−0.09)	(3.34)
Hong Kong	0.060^*	0.079	0.097	0.044
	(3.01)	(1.28)	(0.76)
Ireland	0.007	0.087^***	0.233^*	0.047
	(1.29)	(1.69)	(2.77)
Italy	−0.002	0.052	0.188^*	0.019
	(−0.26)	(1.01)	(2.46)
Japan	0.005	0.049	0.180^*	0.029
	(1.11)	(0.82)	(2.75)
Netherlands	0.005	−0.023	0.234^*	0.030
	(0.85)	(−0.28)	(3.42)
Singapore	0.037^*	0.119^*	0.092	0.034
	(2.84)	(2.46)	(0.97)
Switzerland	0.037^*	0.119	0.092	0.034
	(2.46)	(1.53)	(0.80)
UK	0.029^**	0.115^***	0.006	0.027
	(2.08)	(1.77)	(0.06)
–	–	–	–	–

Note: Entries are coefficient values with Newey–West t-statistics from the predictive regression in Equation (2), given by: $r_{i,t}={\mathit{\alpha }}_i+{\mathit{\beta }}_i\left(d_{i,t-1}-p_{i,t-1}\right)+{\mathit{\rho }}_i{r}_{it,-1}+{\mathit{\rho }}_{\text{usa}}{r}_{\text{usa},t-1}+{\mathit{\epsilon }}_{i,t}$.

^* Level of significance at 1%.

^** Level of significance at 5%.

^*** Level of significance at 10%.

Table 3. Regression of local market on the US market

Country	Div-price	Adj R^2	Returns	Adj R^2
Australia	0.233^*	0.273	0.717^*	0.335
	(6.12)		(8.59)
Austria	0.041	0.002	0.542^*	0.185
	(1.39)		(5.64)
Belgium	0.598^*	0.478	0.664^*	0.364
	(10.98)		(8.96)
Canada	0.664^*	0.853	0.772^*	0.597
	(25.94)		(20.26)
Denmark	0.479^*	0.373	0.642^*	0.305
	(7.14)		(12.39)
France	0.515^*	0.561	0.818^*	0.391
	(12.18)		(17.88)
Germany	0.466^*	0.439	0.715^*	0.393
	(10.32)		(10.01)
Hong Kong	0.386^*	0.330	0.968^*	0.216
	(6.36)		(7.60)
Ireland	0.994^*	0.755	0.853^*	0.355
	(20.59)		(10.85)
Italy	−0.048	0.001	0.683^*	0.208
	(−0.55)		(11.20)
Japan	0.368^*	0.118	0.489^*	0.183
	(4.97)		(8.79)
Netherlands	0.680^*	0.773	0.817^*	0.515
	(18.85)		(12.89)
Singapore	0.274^*	0.176	0.983^*	0.336
	(6.26)		(10.87)
Switzerland	0.470^*	0.487	0.684^*	0.468
	(12.28)		(12.95)
UK	0.503^*	0.787	0.837^*	0.495
	(20.08)		(13.20)

Note: Entries are the coefficient values with Newey–West t-statistics from the regression on the country dividend-price ratio and stock return on the US dividend-price ratio and stock return, respectively, Equation (3), given by $x_{i,t}={\mathit{\alpha }}_i+{\mathit{\beta }}_i{x}_{\text{usa},t}+{\mathit{\epsilon }}_{xi,t}$, where x refers to the dividend-price or returns series, respectively.

^* Level of significance at 1%.

Table 4. Predictive regression with local and global (US) information

Country	Home DY	US DY	Home Ret	US Ret	Adj R^2
Australia	0.032^***	0.006	0.009	0.204^*	0.030
	(1.74)	(1.14)	(0.20)	(3.84)
Austria	0.006	0.003	0.250^*	0.243^*	0.078
	(0.63)	(0.70)	(2.40)	(4.64)
Belgium	0.001	0.004	0.137^**	0.199^*	0.038
	(0.08)	(0.96)	(2.24)	(3.79)
Canada	0.003	0.003	−0.054	0.138^*	0.012
	(0.15)	(0.51)	(−0.69)	(2.95)
Denmark	0.005	0.003	0.155^*	0.137^***	0.023
	(0.62)	(0.69)	(2.44)	(1.89)
France	0.013	0.007	0.045	0.169^*	0.013
	(0.96)	(1.19)	(0.72)	(3.11)
Germany	−0.002	0.005	−0.009	0.189^*	0.021
	(−0.18)	(0.96)	(−0.17)	(3.77)
Hong Kong	0.078^*	0.010	0.093	0.168^**	0.048
	(2.90)	(1.05)	(1.51)	(1.98)
Ireland	0.009	0.007	0.088^***	0.307^*	0.045
	(0.59)	(1.21)	(1.69)	(4.58)
Italy	−0.002	0.011^***	0.048	0.228^*	0.023
	(−0.17)	(1.71)	(0.96)	(3.49)
Japan	0.002	0.010^**	0.040	0.205^*	0.034
	(0.37)	(2.22)	(0.68)	(3.17)
Netherlands	−0.012	0.007	−0.040	0.209^*	0.032
	(−0.62)	(1.54)	(−0.52)	(3.90)
Singapore	0.039^**	0.008	0.120	0.209^*	0.032
	(2.29)	(1.17)	(1.54)	(2.74)
Switzerland	−0.005	0.002	0.069	0.187^*	0.031
	(−0.48)	(0.62)	(1.07)	(3.60)
UK	0.062	0.011^*	0.137	0.110^**	0.031
	(1.43)	(2.31)	(1.42)	(2.23)

Note: Entries are coefficient values with Newey–West t-statistics for the predictive regression, Equation (4), given by: $r_{i,t}={\mathit{\alpha }}_i+{\mathit{\beta }}_{usa}\left(d_{\text{usa},t-1}-p_{\text{usa},t-1}\right)+{\mathit{\beta }}_i{\mathit{\epsilon }}_{dp,i,t-1}+{\mathit{\rho }}_{\text{usa}}{r}_{\text{usa},t-1}+{\mathit{\rho }}_i{\mathit{\epsilon }}_{r,i,t-1}+{\mathit{\nu }}_{i,t}$, where home stock returns are regressed on lagged US stock returns and log dividend yield and the lagged home stock returns and dividend yield, with the latter defined as the residuals from the equations reported in Table 3.

^* Level of significance at 1%.

^** Level of significance at 5%.

^*** Level of significance at 10%.

Figure 1. Principal components analysis for the dividend yield.

Figure 2. Principal components analysis for returns.

Table 5. Principal components factor loadings

	Dividend-price ratio principle comp.			Return principle components
	PC1	PC2	PC3	PC1	PC2	PC3
Australia	0.2262	0.0718	0.5402	0.2324	0.2265	−0.3473
Austria	0.1268	0.4492	−0.0761	0.2091	−0.2096	0.4449
Belgium	0.2677	−0.0763	−0.0975	0.2657	−0.2369	−0.0593
Canada	0.2961	−0.1097	−0.0657	0.2647	0.1446	−0.2440
Denmark	0.2444	−0.0274	−0.2245	0.2265	−0.1332	0.0273
France	0.2912	0.0102	−0.0890	0.2671	−0.2301	−0.0762
Germany	0.2853	0.1861	−0.2050	0.2707	−0.2248	0.2452
Hong Kong	0.1885	−0.2062	0.6052	0.1963	0.5473	0.3760
Ireland	0.2694	−0.2942	−0.0881	0.2573	−0.0050	−0.2727
Italy	0.0880	0.4829	0.2955	0.2240	−0.2704	0.0846
Japan	0.2200	0.3649	−0.2295	0.1887	0.0446	0.4367
Netherlands	0.3016	−0.1393	−0.0833	0.2992	−0.1123	0.0164
Singapore	0.2350	0.2536	0.2299	0.2238	0.5181	0.1726
Switzerland	0.2813	0.1764	−0.0942	0.2834	−0.1365	−0.0134
UK	0.2885	−0.2229	0.0586	0.2768	0.1270	−0.2494
US	0.2733	−0.2825	−0.0470	0.2804	0.1268	−0.2134

Note: Entries are the factor loadings for each market for the first three principle components for the dividend-price ratio and stock returns, respectively.

Table 6. Predictive regression with local and global (principal components) information

Country	Dividend yield				Returns				Adj R^2
	Home	PC1	PC2	PC3	Home	PC1	PC2	PC3
Australia	0.003	0.001	−0.001	0.007^*	−0.060	0.003^*	0.001	0.002	0.035
	(0.99)	(1.25)	(−0.23)	(2.95)	(−0.78)	(3.85)	(0.18)	(1.16)
Austria	0.021	0.001	−0.002	0.007^*	0.172^*	0.005^*	−0.001	0.008^*	0.093
	(1.55)	(0.18)	(−0.14)	(2.69)	(2.50)	(5.92)	(0.39)	(2.57)
Belgium	0.004	0.005	−0.001	0.006^*	0.156^***	0.003^*	0.001	−0.002	0.044
	(0.42)	(0.62)	(−0.71)	(2.58)	(1.91)	(4.21)	(0.62)	(0.65)
Canada	−0.001	0.001	0.001	0.004^**	−0.101	0.002^*	0.003^***	0.004^***	0.031
	(−0.03)	(0.75)	(0.01)	(1.98)	(−1.22)	(3.49)	(1.69)	(1.74)
Denmark	0.011	0.002	−0.012	−0.001	0.122^***	0.003^*	−0.003	0.005^***	0.024
	(0.99)	(0.33)	(−0.70)	(−0.46)	(1.92)	(3.13)	(−0.16)	(1.73)
France	0.049^*	0.001	−0.001	0.007^*	−0.002	0.003^*	0.001	0.002	0.034
	(2.37)	(0.96)	(−0.50)	(2.66)	(−0.02)	(3.17)	(0.32)	(0.62)
Germany	0.032	0.001	−0.001	0.008^*	−0.155^***	0.003^*	0.001	0.002	0.032
	(1.35)	(0.11)	(−0.38)	(3.39)	(−1.69)	(3.72)	(0.49)	(0.67)
Hong Kong	0.091^*	0.002^***	−0.001	0.015^*	−0.045	0.003^**	0.008^**	0.004	0.048
	(2.67)	(1.67)	(−1.47)	(3.78)	(−0.48)	(2.24)	(2.02)	(0.78)
Ireland	0.018	0.001	−0.002	0.006^**	0.016	0.005^*	0.005^***	0.001	0.059
	(0.99)	(0.82)	(−1.14)	(2.10)	(0.21)	(5.27)	(1.80)	(0.22)
Italy	0.013	0.001	−0.003	−0.001	0.017	0.003^*	−0.001	−0.002	0.013
	(0.89)	(0.96)	(−1.31)	(−0.41)	(0.25)	(3.15)	(−0.40)	(−0.50)
Japan	0.010	0.003^***	−0.002	0.001	0.029	0.003^*	0.002	−0.002	0.032
	(0.87)	(1.88)	(−0.94)	(0.27)	(0.48)	(4.11)	(0.75)	(−0.63)
Netherlands	−0.035	0.001	−0.002	0.005^*	−0.186^***	0.003^*	0.004^***	0.002	0.045
	(−1.38)	(1.07)	(−1.32)	(2.40)	(−1.77)	(3.74)	(1.69)	(0.87)
Singapore	0.055^*	0.002^***	0.001	0.009^*	0.118	0.004^*	0.006^***	−0.001	0.036
	(2.41)	(1.89)	(0.12)	(2.59)	(1.25)	(2.95)	(1.72)	(−0.20)
Switzerland	0.008	0.002	−0.001	0.006^*	0.060	0.003^*	0.003	0.001	0.044
	(0.50)	(0.31)	(−0.97)	(3.02)	(0.68)	(4.02)	(1.58)	(0.49)
UK	0.072^**	0.002^*	−0.001	0.006^*	0.051	0.003^*	0.003	−0.001	0.036
	(2.27)	(2.35)	(−0.79)	(2.66)	(0.55)	(2.95)	(1.05)	(−0.27)
US	0.005	0.001^**	−0.002	0.007^*	−0.075	0.001^****	0.002	0.003	0.027
	(0.32)	(2.01)	(−1.05)	(3.19)	(−0.82)	(1.94)	(1.13)	(1.29)

Note: Entries are coefficient values with Newey–West t-statistics for the predictive regression, Equation (6), given by: $r_{i,t}={\mathit{\alpha }}_i+{\sum }_j{\mathit{\beta }}_{ij}p{c}_{dpj,t-1}+{\mathit{\beta }}_i{\mathit{\eta }}_{dpi,t-1}+{\sum }_j{\mathit{\rho }}_{ij}p{c}_{rj,t-1}+{\mathit{\rho }}_i{\mathit{\eta }}_{ri,t-1}+{\mathit{\nu }}_{i,t}$. Home stock returns are regressed on lagged stock return and log dividend yield principal components and the lagged home stock returns and dividend yield, which are defined as the residuals from a regression of stocks returns and log dividend yield on the principal components.

^* Level of significance at 1%.

^** Level of significance at 5%.

^*** Level of significance at 10%.

Table 7. Dividend growth predictive regression with local and global (principal components) information

Country	Home DY	PC1	PC2	PC3	Adj R^2
Australia	−0.052^*	−0.001	−0.002^**	−0.002^***	0.047
	(−4.26)	(−0.43)	(−2.33)	(−1.89)
Austria	−0.046^*	−0.001^***	−0.003^**	0.002	0.045
	(−3.75)	(−1.79)	(−2.07)	(0.85)
Belgium	−0.052^*	−0.001	−0.003	−0.004	0.050
	(−4.63)	(−1.39)	(−1.53)	(−1.54)
Canada	−0.039^*	−0.006	0.003	−0.001	0.035
	(−4.21)	(−1.52)	(0.38)	(−1.11)
Denmark	−0.023^**	−0.002^***	−0.002	0.001	0.018
	(−2.05)	(−1.89)	(−1.16)	(0.19)
France	−0.051^*	−0.001	−0.002^**	−0.0001	0.048
	(−3.09)	(−0.68)	(−2.29)	(0.04)
Germany	−0.029^**	−0.001	−0.002^*	0.001	0.048
	(−2.29)	(−0.84)	(−2.66)	(1.40)
Hong Kong	−0.044^*	0.00	−0.003^*	−0.006^*	0.086
	(−5.13)	(1.17)	(−2.70)	(−4.71)
Ireland	−0.052^*	−0.001	−0.007^*	−0.006^*	0.081
	(−3.88)	(−1.60)	(−4.12)	(−2.80)
Italy	−0.051^*	−0.001	−0.005^*	0.002	0.057
	(−4.85)	(−0.75)	(−3.03)	(0.09)
Japan	0.002	−0.0001	−0.004	−0.0003	0.062
	(0.70)	(−0.57)	(−1.31)	(−0.41)
Netherlands	−0.066^*	−0.001^**	−0.003^*	−0.001	0.099
	(−4.12)	(−2.07)	(2.83)	(−1.26)
Singapore	−0.054^*	0.0002	−0.006^**	−0.003^***	0.041
	(−3.23)	(0.25)	(−2.22)	(1.84)
Switzerland	−0.018^***	−0.001	−0.001^*	0.001	0.025
	(−1.64)	(−1.14)	(−2.73)	(0.92)
UK	−0.033^*	0.001^***	−0.002^*	−0.001	0.049
	(−3.10)	(1.81)	(−3.13)	(−1.12)
US	0.009^**	−0.0001	−0.0001	−0.0001	0.054
	(2.05)	(−0.05)	(−1.51)	(−0.13)

Note: Entries are coefficient values with Newey–West t-statistics for the predictive regression, Equation (6) but with dividend growth replacing stock returns as the dependent variable, of home dividend growth on lagged log dividend yield principal components and the lagged home dividend yield, which is defined as the residuals from a regression of the log dividend yield on the principal components. Home lagged dividend growth is also included in the regression but not reported.

^* Level of significance at 1%.

^** Level of significance at 5%.

^*** Level of significance at 10%.

Table 8. Out-of-sample R² values—rolling forecasts

Country	Model 1	Model 2	Model 3	Model 4
Australia	0.063	0.078	0.115^**	0.188^**
	(0.60)	(0.12)	(0.04)	(0.03)
Austria	0.003^**	0.014^**	0.071^**	0.157^*
	(0.02)	(0.02)	(0.02)	(0.01)
Belgium	0.059	0.093	0.125	0.164^**
	(0.30)	(0.43)	(0.20)	(0.05)
Canada	0.074	0.089	0.124	0.224^***
	(0.68)	(0.24)	(0.16)	(0.06)
Denmark	0.024^***	0.003^*	0.128^***	0.231^**
	(0.06)	(0.01)	(0.09)	(0.03)
France	0.048	0.075	0.108	0.199^***
	(0.88)	(0.56)	(0.34)	(0.10)
Germany	0.063	0.082	0.124	0.174^***
	(0.79)	(0.66)	(0.34)	(0.08)
Hong Kong	0.071	0.087	0.117	0.235^***
	(0.56)	(0.66)	(0.22)	(0.06)
Ireland	0.066	0.066^***	0.099^*	0.145^*
	(0.23)	(0.09)	(0.01)	(0.01)
Italy	0.056	0.082	0.101	0.179^***
	(0.48)	(0.52)	(0.34)	(0.07)
Japan	0.048	0.080	0.116	0.187^***
	(0.27)	(0.17)	(0.15)	(0.08)
Netherlands	0.079	0.087	0.146^***	0.189^**
	(0.61)	(0.35)	(0.09)	(0.04)
Singapore	0.073	0.113	0.160	0.218^**
	(0.76)	(0.50)	(0.34)	(0.05)
Switzerland	0.53	0.078	0.132	0.189^***
	(0.52)	(0.75)	(0.27)	(0.07)
UK	0.089	0.136	0.158^***	0.201^**
	(0.42)	(0.12)	(0.08)	(0.04)
US	0.112	–	–	0.227^**
	(0.46)			(0.05)

Note: Entries are the out-of-sample R² values from Equation (7) with the p-values in parentheses from the Clark and West (2007) test of equal predictive accuracy. The models are given by: Model 1—the dividend-price ratio as in Equation (1); Model 2—this ratio augmented by the US return as in Equation (2); Model 3—the global and local model information model based on the US dividend-price ratio and returns; Model 4—the global and local information model based on the principal components analysis, Equations (4) and (6), respectively.

^* Level of significance at 1%.

^** Level of significance at 5%.

^*** Level of significance at 10%.

Table 9. Out-of-sample R² values—recursive forecasts

Country	Model 1	Model 2	Model 3	Model 4
Australia	0.014	0.009^*	0.014^**	0.048^***
	(0.27)	(0.01)	(0.02)	(0.07)
Austria	0.035^**	−0.009	0.030^**	0.033^*
	(0.03)	(0.13)	(0.02)	(0.01)
Belgium	0.053^**	0.025^**	0.023^*	0.045^*
	(0.03)	(0.03)	(0.01)	(0.00)
Canada	0.019	0.015	0.017	0.021
	(0.79)	(0.18)	(0.24)	(0.15)
Denmark	0.008^**	0.003	0.037	0.049
	(0.04)	(0.50)	(0.15)	(0.34)
France	0.002	0.029	0.015	0.067^**
	(0.25)	(0.11)	(0.24)	(0.03)
Germany	0.019	0.039	0.027	0.044^***
	(0.77)	(0.16)	(0.39)	(0.07)
Hong Kong	0.005	0.036	0.039	0.052^**
	(0.14)	(0.17)	(0.11)	(0.02)
Ireland	0.005	0.031^**	0.023^**	0.076^**
	(0.12)	(0.05)	(0.04)	(0.03)
Italy	0.006	0.029^***	0.017^***	0.035^**
	(0.36)	(0.06)	(0.09)	(0.03)
Japan	0.017	0.036^***	0.019	0.023^***
	(0.65)	(0.06)	(0.12)	(0.07)
Netherlands	0.012	0.023^**	0.023^***	0.014^***
	(0.60)	(0.03)	(0.06)	(0.07)
Singapore	0.020	0.037	0.079	0.128^**
	(0.14)	(0.21)	(0.28)	(0.02)
Switzerland	0.010	0.039^***	0.009	0.026^***
	(0.34)	(0.08)	(0.17)	(0.07)
UK	0.047^***	0.054^**	0.045	0.059
	(0.07)	(0.03)	(0.31)	(0.12)
US	0.020	–	–	0.027
	(0.45)			(0.28)

Note: Entries are the out-of-sample R² values from Equation (7) with the p-values in parentheses from the Clark and West (2007) test of equal predictive accuracy. The models are given by: Model 1—the dividend-price ratio as in Equation (1); Model 2—this ratio augmented by the US return as in Equation (2); Model 3—the global and local model information model based on the US dividend-price ratio and returns; Model 4—the global and local information model based on the principal components analysis, Equations (4) and (6), respectively.

^* Level of significance at 1%.

^** Level of significance at 5%.

^*** Level of significance at 10%.

Clark, T. E., & West, K. D. (2007). Approximately normal tests for equal predictive accuracy in nested models. Journal of Econometrics, 138, 291–311.10.1016/j.jeconom.2006.05.023

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