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Why so Glum? The Meese-Rogoff Methodology Meets the Stock Market

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  • Flood, Robert P
  • Rose, Andrew K

Abstract

This paper applies the Meese-Rogoff (1983a) methodology to the stock market. We compare the out-of-sample forecasting accuracy of various time-series and fundamentals-based models of aggregate stock prices. We stick as close as possible to the original Meese-Rogoff sample and methodology. Just as Meese and Rogoff found for the case of exchange rates, we find that a random walk model of stock prices performs as well as any estimated model at one to twelve month horizons, even though we base forecasts on actual future fundamentals of dividends and earnings. Using this metric and for this sample period, aggregate stock prices seem to be as difficult to model empirically as exchange rates.

Suggested Citation

  • Flood, Robert P & Rose, Andrew K, 2008. "Why so Glum? The Meese-Rogoff Methodology Meets the Stock Market," CEPR Discussion Papers 6714, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:6714
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    References listed on IDEAS

    as
    1. Ivo Welch & Amit Goyal, 2008. "A Comprehensive Look at The Empirical Performance of Equity Premium Prediction," Review of Financial Studies, Society for Financial Studies, vol. 21(4), pages 1455-1508, July.
    2. Charles Engel & Kenneth D. West, 2005. "Exchange Rates and Fundamentals," Journal of Political Economy, University of Chicago Press, vol. 113(3), pages 485-517, June.
    3. Richard Meese & Kenneth Rogoff, 1983. "The Out-of-Sample Failure of Empirical Exchange Rate Models: Sampling Error or Misspecification?," NBER Chapters,in: Exchange Rates and International Macroeconomics, pages 67-112 National Bureau of Economic Research, Inc.
    4. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, vol. 14(1-2), pages 3-24, February.
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    Cited by:

    1. Cerra, Valerie & Saxena, Sweta Chaman, 2010. "The monetary model strikes back: Evidence from the world," Journal of International Economics, Elsevier, vol. 81(2), pages 184-196, July.

    More about this item

    Keywords

    aggregate; dividend; earning; exchange; forecast; fundamental; growth; model; rate;

    JEL classification:

    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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