When comparing historical gains (I used the "adjusted close" data on yahoo) of major indices in different countries it is clear that the US outperformed most of these by quite a bit (see for example also https://www.visualcapitalist.com/worlds-major-stock-markets-same-scale-1990-2019/). From US based sources you often read that the expected average yearly return on investments is around 10%. This figure is based on historical data of for example the Dow Jones Index. However, other major indices had much lower performances (on the extreme end: the Nikkei 225 had basically no gain in the last 30 years).

Is this just a matter of the US having been the (unpredictable) "winner" over the last 100 years (or decade or most time intervals in between)? Just like having picked Apple around 2005 would have been very lucky. If so any prediction on the new average return on investments should clearly not be based just on this "winner" from previous years right? Would it not be more accurate to base the estimate for the average expected return on more (all) markets?

Or does the US predictably outperform other markets for some reason? That would beg the question why all markets are not emptying out and pouring their money into american stocks.

Is there some tax, regulatory, currency or inflation related reason that a consistent predictable gap in the average gain between US markets and other markets would not close?


1 Answer 1


Efficient market hypothesis does not in itself predict that stock market returns will equalize among different stock markets so it should not really be part of the question (efficient market hypothesis only refers to informational efficiency of markets). Rather this is something that would be predicted by trade/international macro models that predict factor return equalization (i.e. Rybczynski, Stolper-Samuelson, and factor-price equalization theorems).

These theories would predict equalization of expected returns to capital due to capital flows between countries. If a country's stock market performs better than some other country capital should flow from the worse performing country to the better performing country until supply and demand for capital equalizes expected returns.

However, in real life expected returns wont always be equal even if they will exhibit tendency to equalize. As you mentioned in your question this can be due to various institutional reasons (Schularick, & Steger, 2008), but it can also be due to imperfect capital mobility, due to market failures, some investments might be geographically specific and so on. The literature on this is extremely broad I suggest looking for keyword factor price equalization on google scholar.

Furthermore, note that link you provided from that site just shows nominal ex post observed returns from stock markets between different countries. That in itself does not actually provide any evidence that ex ante expected returns are not equal between those countries.

  • $\begingroup$ I can leave out the efficient market hypothesis and just give the full argument in the simplest model (I believe this basically amounts to the EMH): If it is (accurate) common knowledge that the US market does better and people are equally free to invest in either market then everyone will move all their money from the other market to the US one. Money will flow into the US market until either the expected return of the other market is equal to the US one or until there simply is no money left in the other market. This can be described without using any fancy model or fancy words. ... $\endgroup$
    – Kvothe
    Commented Sep 10, 2020 at 7:44
  • $\begingroup$ @Kvothe yes but I addressed that in other paragraphs in my opening paragraph I just wanted to let you know that this is not about EMH, but then in rest of my answer I address the underlying question $\endgroup$
    – 1muflon1
    Commented Sep 10, 2020 at 7:49
  • $\begingroup$ ... Indeed it is possible that there are barriers for people to freely invest in either market and that this is the cause for the discrepancy. This is why my question asks whether it is understood that A) Such a barrier is indeed the cause and B) what specific barrier(s) is causing this. (Of course the link shows historical data and not future data if that is what you meant.) Indeed we do not know that this trend will continue. Yet the majority of people including economist seems to agree that the by far most likely scenario is that the long term trend of growth continues. ... $\endgroup$
    – Kvothe
    Commented Sep 10, 2020 at 7:50
  • $\begingroup$ However, they often then base their expected long term yield just on the US data and not on all market data. This to me seems like basing your expected long term yield on a "winner" which is very wrong. Just like it would be wrong to pick just Apple as a stock example and predict long term yield for any stock based on that. Note that there is a non-trivial important question here with two possible fundamentally different answers. Either 1.) there is a understood different return caused by some barriers in which case it can be public knowledge that the US will again do better. Or ... $\endgroup$
    – Kvothe
    Commented Sep 10, 2020 at 7:55
  • $\begingroup$ ... Or 2.) The US was just the "winner stock" over the past history and thus the efficient market has already acted on this trend and there is no future expectation anymore that the US will outperform other markets. This means that a more accurate prediction of average yield of any stock should include data from all markets (and will probably come out a lot lower than 10%). $\endgroup$
    – Kvothe
    Commented Sep 10, 2020 at 7:57

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