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Common Patterns of Predictability in the Cross-Section of International Stock Returns | an Overview

Last Updated on 10 February, 2024 by Rejaul Karim

The research paper “Common Patterns of Predictability in the Cross-Section of International Stock Returns” authored by Steven L. Heston and Ronnie Sadka presents a compelling exploration of international stock strategies grounded in historical returns.

A noteworthy finding of the study is the persistent outperformance of stocks in specific calendar months, transcending national borders and lasting up to a decade. This recurring pattern, observed not only in the U.S. but also in Canada, twelve European countries, and notably in Japan, remains independent of country, currency, and market capitalization.

The study unveils that these strategies exhibit low correlation across countries, suggesting that they may not signify return premiums for pervasive international risk. Instead, the common seasonal structure in international stocks points to shared segmented return mechanisms.

This research offers valuable insights into market integration and behavioral finance in the realm of international stock returns.

Abstract Of Paper

This paper studies the performance of international stock strategies based on historical returns. Stocks that outperform the local market in a particular month continue to outperform the local market in futures years in that same calendar month. This effect lasts for 10 years and in addition to the U.S., the same pattern appears in Canada, twelve European countries, and most notably in Japan. This return pattern is independent of country, currency, and market capitalization. The resulting strategies are not highly correlated across countries. This indicates they may not reflect return premiums for pervasive international risk. Instead this common season structure in internaional stocks suggests countries share similar segmented return mechanisms.

Original paper – Download PDF

Here you can download the PDF and original paper of Common Patterns of Predictability in the Cross-Section of International Stock Returns.

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Author

Steven L. Heston
University of Maryland – Department of Finance

Ronnie Sadka
Boston College – Carroll School of Management

Conclusion

In summary, “Common Patterns of Predictability in the Cross-Section of International Stock Returns” by Steven L. Heston and Ronnie Sadka offers a significant contribution to the understanding of international stock market dynamics.

The study’s revelation of stocks outperforming local markets in specific calendar months persisting for up to a decade across various countries, independent of country, currency, and market size, sheds light on shared segmented return mechanisms.

Notably, the low correlation of resulting strategies across countries implies that they do not purely reflect return premiums for widespread international risk but rather underscore a common seasonal structure in international stocks.

This illuminates the nuanced nature of market integration and behavioral finance in the realm of international stock returns, challenging conventional assumptions and warranting further exploration into the underlying mechanisms driving these recurring patterns.

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FAQ

What is the key finding of the research paper “Common Patterns of Predictability in the Cross-Section of International Stock Returns”?

The key finding of the paper is the persistent outperformance of stocks in specific calendar months, lasting up to a decade, across various countries. This phenomenon is observed not only in the U.S. but also in Canada, twelve European countries, and notably in Japan. The stocks that outperform the local market in a particular month continue to exhibit this outperformance in future years during the same calendar month.

Is the observed return pattern correlated across countries, and what does this imply about international risk premiums?

The study reveals that the resulting strategies based on the observed return pattern are not highly correlated across countries. This low correlation suggests that these strategies may not reflect return premiums for widespread international risk. Instead, the common season structure in international stocks points to shared segmented return mechanisms.

How long does the observed return pattern persist in the study’s findings?

The observed return pattern, where stocks outperform the local market in specific calendar months, persists for up to 10 years. This extended time frame emphasizes the longevity and robustness of the identified seasonal effect in international stock returns.

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