Group return predictability

Table 2.1 reports OLS estimates of , robust t-statistic, and adjusted R-square for predictive regression model (1).

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Dependent variables are excess returns for the More-Com group, while main explanatory variables are excess returns for the Less-Com group. We consider results from both the equally-weighted and value-weighted methods. Specifically, Panel A reports the predictive results with predictor as returns for the whole Less-Com group; whereas, Panel B presents the predictive results by the US return and Panel C reports the results with the return for the Non- US Less-Com group27 as a predictor. The inclusion of and as additional explanatory variables in model (1) controls for the predictive ability of a country’s economic variables. We report the Newey and West’s (1987) robust t-statistic in parentheses in the first, second, third, fifth, sixth, and seventh columns. The ̂ estimates are statistically positive and significant at 10% level of significance or better, indicating that returns for the Less-Com group can predict future stock returns for the More-Com group. These results are consistent for both the equally-weighted method and value-weighted methods. The only exceptions are the predictive results from the US returns, which can predict equally- weighted returns for the More-Com group but display no predictability for the value- weighted returns for the same group. These results suggest that returns for countries with a less complicated information processing capacity can predict returns for countries with more complicated information processing. In other words, the complications in information processing across countries do help forecast stock return28.

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We do not use the US returns and returns for the Non-US group as joint predictors in model (3) due to their high correlation. We report these correlations in Appendix I.

28

We also estimate the predictive regression model (1) for excess returns computed from Thompson Reuters Datastream and report results in Appendix G1. These results are relatively similar to those from GFD’s return indices.

We also consider the predictive ability of a group’s economic variables, proxied by the three-month Treasury bill rate and log dividend yield for the More-Com group. Parentheses below the ̅ statistic in the fourth and eighth columns report the heteroskedasticity-robust statistic for testing the null hypothesis of no return predictability for Treasury bill rate ) and log dividend yield ) in model (2): Ho: = = 0. We reject this null hypothesis for results from the equally-weighted method in Panel A and Panel B, and do not reject the null hypothesis for the rest.

We examine the reversed relationship to test if returns for the More-Com group can predict stock returns for the Less-Com group. This relationship, if it exists, will cast doubt on the return predictability generated from country information processing capacities. We report the predictive results in Appendix F.1. Overall, there is no significant evidence to support the reversed relation since returns for the More-Com group have very limited predictive ability for the Less-Com group’s future returns.

We also report, in Appendix E, the benchmark predictive regression that examines the return predictability for the three month Treasury-bill rate and log dividend yield for the More-Com group. The estimated results in Appendix E are consistent with previous findings. In brief, the Treasury-bill rate and log dividend yield for the More-Com group present some predictive power for future stock returns for the More-Com group.

For further analysis, we examine the predictive ability of the Less-Com group for the More- Com group’s return for each region by estimating the predictive regression (4). Table 2.3 reports OLS estimates of , robust t-statistic, and adjusted R-square (̅ ) for regression model (4). Dependent variables are returns for the More-Com group in each region, while the main explanatory variables are returns for the Less-Com group in that region. Specifically, we estimate the predictive ability for four predictors from the Less-Com group: (1) returns for the Regional Less-Com group; (2) returns for the Less-Com group; (3) the US returns; and (4) returns for the Non-US group. The inclusion of and as additional explanatory variables in model (4) controls for the predictive ability of the regional group’s

economic variables. Panel A reports the predictive results for the More-Com group in the American region; whereas, Panel B presents the predictive results for the European region and Panel C reports the results for Asian countries. The estimated results suggest that not only does the Less-Com group in the whole sample, but also the Less-Com group in each region, and the Non-US group predict future returns for the More-Com group in that region. Consistent with previous findings, the equally-weighted method in each region provides more significant evidence for return predictability than that from the value-weighted method.

Furthermore, for the American and European regions, the adjusted R-square is relatively higher for the Less-Com group compared to the Regional Less-Com group. However, a reversed trend is captured in the Asian region, with the Regional Less-Com exhibiting higher

̅ than the Less-Com group. For the value-weighted method, only the Asian region displays a substantial difference between estimated ̅ from the Regional Less-Com and the Less-Com group. This evidence suggests that under the equally-weighted method, returns from the Less-Com group seem to do better than returns from the Regional Less-Com group in predicting returns for the Regional More-Com group in the American and European regions; whereas; a reversed trend is captured when the Regional Less-Com group’s returns seem to be the better predictors for the Asian More-Com group’s return. In addition, regarding the value-weighted method, returns from the Regional Less-Com group seem to be the best predictor for future returns for the More-Com group in each region.

Surprisingly, the US, the largest economy in the American region can, on one hand, predict future stock returns for the More-Com group in Asian and European countries; but on other hand, displays no predictive power for returns for the American More-Com group. The combination of the US and Canadian returns, which are illustrated by the Regional Less-Com group in the American region, however, can predict the More-Com group in every region. These results may suggest the role of the Canadian market, along with the US market, in international country return predictability.