International Evidence for Return Predictability and the Implications for Long-Run Covariation of the G7 Stock Markets

Temporary fluctuations of the US consumption-wealth ratio do not only predict excess returns on the US but also international stock markets at the business cycle frequency. This finding is the reflection of a common, temporary component in national stock markets. Exposure to this common component explains up to 50% of the pairwise covariation among long-horizon returns on the G7 stock markets for the time period from 1970 to 2008. This latter finding is less pronounced in the post-1990s period.