Evaluating the Forecast Accuracy of Emerging Market Stock Returns

Andre Carvalhal and Beatriz Vaz de Melo Mendes

Emerging Markets Finance and Trade, 2008, vol. 44, issue 1, 21-40

Abstract: This paper analyzes the forecast performance of emerging market stock returns using standard autoregressive moving average (ARMA) and more elaborated autoregressive conditional heteroskedasticity (ARCH) models. Our results indicate that the ARMA and ARCH specifications generally outperform random walk models. Models that allow for asymmetric shocks to volatility are better for in-sample estimation (threshold autoregressive conditional heteroskedasticity for daily returns and exponential generalized autoregressive conditional heteroskedasticity for longer periods), and ARMA models are better for out-of-sample forecasts. The results are valid using both U. S. dollar and domestic currencies. Overall, the forecast errors of each Latin American market can be explained by the forecasts of other Latin American markets and Asian markets. The forecast errors of each Asian market can be explained by the forecasts of other Asian markets, but not by Latin American markets. Our predictability results are economically significant and may be useful for portfolio managers to enter or leave the market.

Keywords: asymmetric shocks; emerging markets; forecasts; generalized autoregressive conditional heteroskedasticity (GARCH) models (search for similar items in EconPapers)
Date: 2008
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