Non-linear predictability of stock market returns: comparative evidence from Japan and the US

Using smooth transition regression model analysis, we examine the non linear predictability of Japanese and US stock market returns by a set of macroeconomic variables between 1981 and 2006. The theoretical basis for investigating non-linear behaviour in stock returns can be based on the interaction between noise traders and arbitrageurs or behavioural finance theories of non-linear risk aversion. Our findings support differences in non-linearity of stock returns in Japan and the US that might be linked to different share-ownership of the Japanese stock market compared to the US.