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Forecasting Commodity Prices: GARCH, Jumps, and Mean Reversion

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  • Jean-Thomas Bernard
  • Lynda Khalaf
  • Maral Kichian
  • Sebastien McMahon

Abstract

Fluctuations in the prices of various natural resource products are of concern in both policy and business circles; hence, it is important to develop accurate price forecasts. Structural models provide valuable insights into the causes of price movements, but they are not necessarily the best suited for forecasting given the multiplicity of known and unknown factors that affect supply and demand conditions in these markets. Parsimonious representations of price processes often prove more useful for forecasting purposes. Central questions in such stochastic models often revolve around the time-varying trend, the stochastic convenience yield and volatility, and mean reversion. The authors seek to assess and compare alternative approaches to modelling these effects, focusing on forecast performance. Three econometric specifications are considered that cover the most up-to-date models in the recent literature on commodity prices: (i) random-walk models with autoregressive conditional heteroscedasticity (ARCH) or generalized ARCH (GARCH) effects, and with normal or student-t innovations, (ii) Poisson-based jump-diffusion models with ARCH or GARCH effects, and with normal or student-t innovations, and (iii) meanreverting models that allow for uncertainty in equilibrium price.

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Bibliographic Info

Paper provided by Bank of Canada in its series Working Papers with number 06-14.

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Length: 21 pages
Date of creation: 2006
Date of revision:
Handle: RePEc:bca:bocawp:06-14

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Keywords: Econometric and statistical methods;

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References

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Cited by:
  1. Jonathan A. Batten, Cetin Ciner and Brian M. Lucey, 2008. "The Macroeconomic Determinants of Volatility in Precious Metals Markets," The Institute for International Integration Studies Discussion Paper Series iiisdp255, IIIS.
  2. Hafedh Bouakez & Badye Omar Essid & Michel Normandin, 2010. "Stock Returns and Monetary Policy: Are There Any Ties ?," Cahiers de recherche 1026, CIRPEE.
  3. 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, vol. 32(3), pages 709-725, May.
  4. 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.
  5. 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.

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