Market Timing of International Stock Markets Using the Yield Spread

Abstract

We use probit modeling to forecast bear stock markets in the United States and in eight major foreign stock markets. In general, we find that the U.S. yield spread contains more important market-timing information than does the home-country yield spread for profitable market timing. At a 35% probability screen, our simulations show that the U.S. dollar (representative local currency) investor could earn a median compound annual return across eight foreign (non-U.S.) stock markets of 15.75% (17.67%) by following a market-timing strategy versus a median buy-and-hold return of 13.56% (16.55%). 2004 The Southern Finance Association and the Southwestern Finance Association.