Does the U.S. extreme indicator matter in stock markets? : international evidence

We propose a new predictor - the innovation in the daily return minimum in the U.S. stock market () - for predicting international stock market returns. Using monthly data for a wide range of 17 MSCI international stock markets during the period spanning over half a century from January 1972 to July 2022, we find that have strong predictive power for returns in most international stock markets: negatively predicts the next-month stock market returns. The results remain robust after controlling for a number of macroeconomic predictors and conducting subsample and panel data analyses, indicating that has significant predictive power and it outperforms other variables in international markets. Notably, demonstrates excellent predictive power even during the periods driven by financial upheavals (e.g., Global Financial Crisis and European Sovereign Debt Crisis). Both panel regressions and out-of-sample tests also support the robust predictive performance of . The predictive power, however, disappears during the non-financial crisis caused by COVID-19 pandemic, which is originated from the health sector rather than the financial sector. The results provide a new perspective on U.S. extreme indicator in stock market return predictability.