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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Publisher Info
Paper provided by Bank of Canada in its series Working Papers with number
06-14.
Find related papers by JEL classification: C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation and Testing C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Other Model Applications E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation
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