I'm trying to write an undergraduate thesis wherein I test the predictive power of a given econometric model on a given financial time series. I need some advice on how I should go about doing this. To put matters into context, I have mostly self-studied econometrics; the only course I took on the subject stopped short of delving into time series models, so I am by no means an expert on the subject.
To my dismay, I recently read that ARIMA models are very poor at predicting stock (and other security) returns. A professor in my school's economics department also confirmed this. All this time I was hoping they could perhaps be even remotely useful for forecasting some financial time series... Are there any other models I could look at? My goal is simply to learn some econometric modeling of time series in R or MATLAB and hopefully find statistically significant predictive results. Also, is there a particular market you would look at (energy, rates, equities)?
Lastly, is GARCH only used for forecasting volatility? The professor I mentioned seemed to suggest I should turn toward GARCH or ARIMA-GARCH models to model stock returns. I read some papers that seemed to imply it could also be used for actual returns... Perhaps I misunderstood. Would the AR and MA components in an ARIMA-GARCH model differ from those in an ARMA model? From what I vaguely understood, ARIMA and GARCH are two completely separate things (with the former being used to predict the actual time series and the other to predict its volatility).
I hope that's not too many questions, but I just don't know where to turn to anymore, I've been researching this on my own for so long. Thanks a lot!