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Forecasting commodity prices: GARCH, jumps, and mean reversion

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  • Jean-Thomas Bernard

    (Départment d'économique, and GREEN, Université Laval, Quebec City, Quebec, Canada)

  • Lynda Khalaf

    (Economics Department, Carleton University, Ottawa, Ontario, Canada)

  • Maral Kichian

    (Research Department, Bank of Canada, Ottawa, Ontario, Canada)

  • Sebastien Mcmahon

    (Ministry of Finance, and GREEN, Université Laval, Quebec City, Quebec, Canada)

Abstract

In examining stochastic models for commodity prices, central questions often revolve around time-varying trend, stochastic convenience yield and volatility, and mean reversion. This paper seeks to assess and compare alternative approaches to modelling these effects, with focus on forecast performance. Three specifications are considered: (i) random-walk models with GARCH and normal or Student- t innovations; (ii) Poisson-based jump-diffusion models with GARCH and normal or Student- t innovations; and (iii) mean-reverting models that allow for uncertainty in equilibrium price. Our empirical application makes use of aluminium spot and futures price series at daily and weekly frequencies. Results show: (i) models with stochastic convenience yield outperform all other competing models, and for all forecast horizons; (ii) the use of futures prices does not always yield lower forecast error values compared to the use of spot prices; and (iii) within the class of (G)ARCH random-walk models, no model uniformly dominates the other. Copyright © 2008 John Wiley & Sons, Ltd.

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Bibliographic Info

Article provided by John Wiley & Sons, Ltd. in its journal Journal of Forecasting.

Volume (Year): 27 (2008)
Issue (Month): 4 ()
Pages: 279-291

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Handle: RePEc:jof:jforec:v:27:y:2008:i:4:p:279-291

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Web page: http://www3.interscience.wiley.com/cgi-bin/jhome/2966

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Cited by:
  1. Bernard, Jean-Thomas & Khalaf, Lynda & Kichian, Maral & McMahon, Sébastien, 2008. "Oil Prices: Heavy Tails, Mean Reversion and the Convenience Yield," Cahiers de recherche 0801, GREEN.
  2. Batten, Jonathan A. & Ciner, Cetin & Lucey, Brian M., 2010. "The macroeconomic determinants of volatility in precious metals markets," Resources Policy, Elsevier, Elsevier, vol. 35(2), pages 65-71, June.
  3. Bouakez, Hafedh & Essid, Badye & Normandin, Michel, 2013. "Stock returns and monetary policy: Are there any ties?," Journal of Macroeconomics, Elsevier, Elsevier, vol. 36(C), pages 33-50.
  4. Sinha, Pankaj & Mathur, Kritika, 2013. "A study on the Price Behavior of Base Metals traded in India," MPRA Paper 47028, University Library of Munich, Germany.
  5. Heydari, Somayeh & Siddiqui, Afzal, 2010. "Valuing a gas-fired power plant: A comparison of ordinary linear models, regime-switching approaches, and models with stochastic volatility," Energy Economics, Elsevier, Elsevier, vol. 32(3), pages 709-725, May.

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