The recent financial and economic crisis has heightened research and policy attention to the stock market dynamics, in particular its predictability. This is because of the potential spill over effects from the stock markets to the real sector and the fact that they help in predicting output and inflation by acting as leading indicators (Stock and Watson 2003). Therefore, to design appropriate policies in advance for avoiding any impending crisis, there is need to predict stock returns accurately. There has been evidence of the U.S. and other international stock returns in-sample and out-of-sample predictability in a number of studies (Rapach and Wohar 2006; Ang and Bekaert 2007; Rapach and Zhou 2013; Henkel et al. 2011; Ferreira and Santa-Clara 2011; Dangl and Halling 2012; Gupta and Modise 2012; Rapach et al. 2013 e.t.c.). However, this has been questioned in few other studies (Bossaerts and Hillion 1999; Goyal and SantaClara 2003; Goyal and Welch 2008). Also the question of which variables have predictive ability is still an on-going debate. Common predictors in the literature include: valuation ratios (Campbell and Shiller 1998), the dividend yield (Rozeff 1984; Henkel et al. 2011; Rapach et al. 2013), the short interest rate (Ang and Bekaert 2007; Dangl and Halling 2012; Henkel et al. 2011; Rapach et al. 2013), the default premium (Fama and Bliss 1987; Campbell 1987; Fama and French 1989), the slope of the term structure (Keim and Stambaugh 1986; Campbell 1987; Fama and French 1989), long term yield and dividend-payout ratio (Dangl and Halling 2012; Gupta and Modise 2012), earnings growth (Ferreira and Santa-Clara 2011); price-dividend and price-earnings ratio (Ferreira and Santa-Clara 2011; Gupta and Modise 2012), debt ceiling and government shutdown (Aye et al. forthcoming) among others. This study focuses on the lagged U.S. returns uncovered as a new predictor in Rapach et al. (2013). Using monthly data from 1980:2 to 2010:12 on 11 industrialized countries, Rapach et al. (2013) show that in many non-U.S. industrialized countries lagged U.S. returns significantly predict returns better than those countries’ own economic variables, while lagged non-U.S. returns exhibit limited predictive power with respect to U.S. returns. Using news diffusion model, they show that U.S. return shocks are only fully reflected in equity prices outside of the U.S. with a lag. The economic rationale for including lagged U.S. returns as a predictor is based on the argument that returns in one country can predict returns in a trading-partner country if a two-country Lucas-tree framework with gradual information diffusion is employed (Hong et al. 2007; Rizova 2010). Therefore, given that U.S. has the largest equity market in the world in terms of market capitalisation, and is a trading partner for many countries, the market is likely to receive the most attention from investors, consequently causing a gradual diffusion of information on the global macroeconomic fundamentals from the U.S. market to other countries’ markets (Rapach et al. 2013).