Stock Return Predictability: Evidence from ASEAN Market Indices

Abstract

I investigate stock return predictability on ASEAN market indices using lagged return of industrialized countries. The data contains weekly return from six market indices in ASEAN along with twelve industrialized countries indices. Using pairwise Granger causality test, I find that lagged returns of Canada, Germany, United Kingdom, and United States are positive and significant in predicting index returns of six ASEAN countries even after controlling for countrys macroeconomic variables as well as their own lagged return. Meanwhile, lagged ASEAN returns do not have predictive ability to industrialized countries returns. By using news-diffusion model to examine the source of their predictive power, I find that the results indicating the predictive ability of those four countries are consistent with the existence of information frictions across national equity markets.