The sum-of-the-parts method: An international application

A Work Project, presented as part of the requirements for the Award of a Masters Degree in Finance from the NOVA – School of Business and Economics

Forecasting stock market returns has a long tradition in the academic literature, but most of the research focuses on the US stock market. In this study, I propose extending the sum-of-the-parts method (Ferreira and Santa-Clara (2008)) to four of the major international stock markets - Canada, France, Japan, and the UK - using variables that have been suggested as stock return predictors for the US. I find evidence that stock market return predictability varies substantially across countries. When compared to the US market, out-of-sample predictability is strong in Japan and the UK. Overall, the results of this study suggest that the sum-of-the-parts method is robust across countries as it always improves the forecasting performance on the traditional predictive regression model.