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Commodity prices, commodity currencies, and global economic developments

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  • Groen, Jan J. J.
  • Pesenti, Paolo

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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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7689.

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Date of creation: Feb 2010
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Handle: RePEc:cpr:ceprdp:7689

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Keywords: Commodity prices; Exchange rates; Factor models; Forecasting; PLS regression;

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References

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  1. 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.
  2. Aasim M. Husain & Chakriya Bowman, 2004. "Forecasting Commodity Prices," IMF Working Papers 04/41, International Monetary Fund.
  3. Reinhart, Carmen, 1988. "Real Exchange Rate and Commodity Prices in a Neoclassical Model," MPRA Paper 13188, University Library of Munich, Germany.
  4. Jan J.J. Groen & George Kapetanios, 2008. "Revisiting Useful Approaches to Data-Rich Macroeconomic Forecasting," Working Papers 624, Queen Mary, University of London, School of Economics and Finance.
  5. Selim Elekdag & Rene Lalonde & Douglas Laxton & Dirk Muir & Paolo Pesenti, 2008. "Oil Price Movements and the Global Economy: A Model-Based Assessment," NBER Working Papers 13792, National Bureau of Economic Research, Inc.
  6. 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.
  7. Yu-chin Chen & Kenneth Rogoff & Barbara Rossi, 2008. "Can Exchange Rates Forecast Commodity Prices?," Working Papers UWEC-2008-11-FC, University of Washington, Department of Economics, revised Oct 2009.
  8. Akram, Q. Farooq, 2009. "Commodity prices, interest rates and the dollar," Energy Economics, Elsevier, vol. 31(6), pages 838-851, November.
  9. Jean Boivin & Serena Ng, 2003. "Are More Data Always Better for Factor Analysis?," NBER Working Papers 9829, National Bureau of Economic Research, Inc.
  10. Reinhart, Carmen & Borensztein, Eduardo, 1994. "The Macroeconomic Determinants of Commodity Prices," MPRA Paper 6979, University Library of Munich, Germany.
  11. 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.
  12. 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.
  13. Jan J. J. Groen & George Kapetanios, 2009. "Model selection criteria for factor-augmented regressions," Staff Reports 363, Federal Reserve Bank of New York.
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Cited by:
  1. Yu-Chin Chen & Kenneth S. Rogoff & Barbara Rossi, 2010. "Can Exchange Rates Forecast Commodity Prices?," The Quarterly Journal of Economics, MIT Press, vol. 125(3), pages 1145-1194, August.
  2. 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.
  3. 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.
  4. Gazi Salah Uddin & Aviral Kumar Tiwari & Mohamed Arouri & Frederic Teulon, 2014. "On the relationship between oil price and exchange rates: A wavelet analysis," Working Papers 2014-456, Department of Research, Ipag Business School.
  5. 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.
  6. Wolfgang Pollan, 2013. "Inflation Persistence or the Protracted Effects of Commodity Price Changes?," WIFO Working Papers 451, WIFO.
  7. 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.

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