American Trade Influence: Across Foreign Markets, Exports to the United States, Not Total Exports, Drive Stock Returns

• Main Author: Das, Kartik
• Format: Others
• Published: Scholarship @ Claremont 2015
• Subjects: International trade; Exports; Imports; Stock returns; Foreign markets; United States; International Economics
• Online Access: http://scholarship.claremont.edu/cmc_theses/1207; http://scholarship.claremont.edu/cgi/viewcontent.cgi?article=2117&context=cmc_theses

This paper explores the relationship between lagged stock returns and export growth in a panel of worldwide markets. Previous studies have focused on analyzing the effect of future economic output growth on stock returns. This study finds that annualized changes in a foreign country’s exports to the United States five to seven years in the future, defined as long-term, positively predict the annual stock market returns while the nation’s total export changes are already priced-in. An additional percentage point increase in long-term exports to the United States growth results in a 0.1 to 3.5 percentage point rise in annual stock returns. However, both growth in total exports and those to the United States do not predict equity returns over the short-term, defined as average annual growth from year 0 to year 4. Thus, establishing a foothold and cracking the highly competitive and homogeneous United States market is not guaranteed and unpredictable, requiring 5 years of investments before successful foreign firms are able convert it into earnings. Alternatively, investors may be shortsighted, uninformed, and pay limited attention about a foreign country’s exports to the United States beyond their forecast horizon, for example, five years. Moreover, the analysis finds that GDP growth at both the foreign country and United States level does not affect lagged foreign stock returns and could be priced-in, unlike long-term growth in the nation’s exports to United States.