Why so Glum? The Meese-Rogoff Methodology Meets the Stock Market
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.
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NBER Working Papers
10723, National Bureau of Economic Research, Inc.
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in: Exchange Rates and International Macroeconomics, pages 67-112
National Bureau of Economic Research, Inc.
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