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Commodity Prices, Commodity Currencies, and Global Economic Developments

In: Commodity Prices and Markets, East Asia Seminar on Economics, Volume 20

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  • Jan J. J. Groen
  • Paolo A. Pesenti

Abstract

In this paper we seek to produce forecasts of commodity price movements that can systematically improve on naive statistical benchmarks, and revisit the forecasting performance of changes in commodity currencies as efficient predictors of commodity prices, a view emphasized in the recent literature. In addition, we consider different types of factor-augmented models that use information from a large data set containing a variety of indicators of supply and demand conditions across major developed and developing countries. These factor-augmented models use either standard principal components or partial least squares (PLS) regression to extract dynamic factors from the data set. Our forecasting analysis considers ten alternative indices and sub-indices of spot prices for three different commodity classes across different periods. We .find that the exchange rate-based model and especially the PLS factor-augmented model are more prone to outperform the naive statistical benchmarks. However, across our range of commodity price indices we are not able to generate out-of-sample forecasts that, on average, are systematically more accurate than predictions based on a random walk or autoregressive specifications.

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This chapter was published in:

  • Takatoshi Ito & Andrew K. Rose, 2011. "Commodity Prices and Markets, East Asia Seminar on Economics, Volume 20," NBER Books, National Bureau of Economic Research, Inc, number ito_09-1.
    This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 11856.

    Handle: RePEc:nbr:nberch:11856

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    1. Kenneth D. West & Todd Clark, 2006. "Approximately Normal Tests for Equal Predictive Accuracy in Nested Models," NBER Technical Working Papers 0326, National Bureau of Economic Research, Inc.
    2. Jean Boivin & Serena Ng, 2003. "Are More Data Always Better for Factor Analysis?," NBER Working Papers 9829, National Bureau of Economic Research, Inc.
    3. Chen, Yu-chin & Rogoff, Kenneth & Rossi, Barbara, 2008. "Can Exchange Rates Forecast Commodity Prices?," Working Papers 08-03, Duke University, Department of Economics.
    4. Selim Elekdag & Ren� Lalonde & Douglas Laxton & Dirk Muir & Paolo Pesenti, 2008. "Oil Price Movements and the Global Economy: A Model-Based Assessment," IMF Staff Papers, Palgrave Macmillan, vol. 55(2), pages 297-311, June.
    5. Q. Farooq Akram, 2008. "Commodity prices, interest rates and the dollar," Working Paper 2008/12, Norges Bank.
    6. Lutz Kilian, 2009. "Not All Oil Price Shocks Are Alike: Disentangling Demand and Supply Shocks in the Crude Oil Market," American Economic Review, American Economic Association, vol. 99(3), pages 1053-69, June.
    7. Jan J. J. Groen & George Kapetanios, 2009. "Model selection criteria for factor-augmented regressions," Staff Reports 363, Federal Reserve Bank of New York.
    8. Jan J. J. Groen & George Kapetanios, 2008. "Revisiting useful approaches to data-rich macroeconomic forecasting," Staff Reports 327, Federal Reserve Bank of New York.
    9. Reinhart, Carmen & Borensztein, Eduardo, 1994. "The Macroeconomic Determinants of Commodity Prices," MPRA Paper 6979, University Library of Munich, Germany.
    10. Margaret E. Slade & Henry Thille, 2006. "Commodity Spot Prices: An Exploratory Assessment of Market Structure and Forward-Trading Effects," Economica, London School of Economics and Political Science, vol. 73(290), pages 229-256, 05.
    11. Reinhart, Carmen, 1988. "Real Exchange Rate and Commodity Prices in a Neoclassical Model," MPRA Paper 13188, University Library of Munich, Germany.
    12. Clark, Todd E. & West, Kenneth D., 2006. "Using out-of-sample mean squared prediction errors to test the martingale difference hypothesis," Journal of Econometrics, Elsevier, vol. 135(1-2), pages 155-186.
    13. Aasim M. Husain & Chakriya Bowman, 2004. "Forecasting Commodity Prices," IMF Working Papers 04/41, International Monetary Fund.
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    Cited by:
    1. Uddin, Gazi Salah & Tiwari, Aviral Kumar & Arouri, Mohamed & Teulon, Frédéric, 2013. "On the relationship between oil price and exchange rates: A wavelet analysis," Economic Modelling, Elsevier, vol. 35(C), pages 502-507.
    2. Ding, Liang & Vo, Minh, 2012. "Exchange rates and oil prices: A multivariate stochastic volatility analysis," The Quarterly Review of Economics and Finance, Elsevier, vol. 52(1), pages 15-37.
    3. Yu-chin Chen & Kenneth Rogoff & Barbara Rossi, 2010. "Can Exchange Rates Forecast Commodity Prices?," Working Papers 10-07, Duke University, Department of Economics.
    4. Wolfgang Pollan, 2013. "Inflation Persistence or the Protracted Effects of Commodity Price Changes?," WIFO Working Papers 451, WIFO.
    5. Gazi Salah Uddin & Aviral Kumar Tiwari, 2013. "Measuring co-movement of oil price and exchange rate differential in Bangladesh," Economics Bulletin, AccessEcon, vol. 33(3), pages 1922-1930.
    6. West, Kenneth D. & Wong, Ka-Fu, 2014. "A factor model for co-movements of commodity prices," Journal of International Money and Finance, Elsevier, vol. 42(C), pages 289-309.
    7. Tokuo Iwaisako, 2011. "Comment on "The Relationship between Commodity Prices and Currency Exchange Rates: Evidence from the Futures Markets"," NBER Chapters, in: Commodity Prices and Markets, East Asia Seminar on Economics, Volume 20, pages 71-72 National Bureau of Economic Research, Inc.

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