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Forecasting Financial Returns with a Structural Macroeconomic Model

Author

Listed:
  • Eric Jondeau

    (University of Lausanne; Swiss Finance Institute)

  • Michael Rockinger

    (University of Lausanne - School of Economics and Business Administration (HEC-Lausanne); Centre for Economic Policy Research (CEPR); Swiss Finance Institute)

Abstract

This paper investigates the ability of a fully structural macro-finance model to forecast long-term financial returns. We estimate a Dynamic Stochastic General Equilibrium (DSGE) model that describes the dynamics of the U.S. economy. The model includes government bond and stock market returns, which allows us to describe bond and stock risk premia. We first show that these risk premia are fundamentally related to other shocks in the economy. Second, the DSGE model reproduces the mean reversion in the term structure of risks for bond and stock returns. It also generates long-term forecasts of financial returns that outperform unrestricted VAR models.

Suggested Citation

  • Eric Jondeau & Michael Rockinger, 2016. "Forecasting Financial Returns with a Structural Macroeconomic Model," Swiss Finance Institute Research Paper Series 16-13, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp1613
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    File URL: http://ssrn.com/abstract=2741141
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    Cited by:

    1. Hasler, Michael & Khapko, Mariana & Marfè, Roberto, 2019. "Should investors learn about the timing of equity risk?," Journal of Financial Economics, Elsevier, vol. 132(3), pages 182-204.

    More about this item

    Keywords

    DSGE model; VAR model; Financial returns; Long-term forecast;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications

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