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

Abstract. 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.