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Risk-adjusted forecasts of oil prices

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  • Pagano, Patrizio
  • Pisani, Massimiliano

Abstract

This paper documents the existence of a significant forecast error on crude oil futures. We interpret it as a risk premium, which, in part, could have been explained by means of a real-time US business cycle indicator, such as the degree of capacity utilization in manufacturing. This result is robust to the specification of the estimating equation and to the considered business cycle indicator. An out-of-the-sample prediction exercise reveals that futures adjusted to take into account this time-varying component produce significantly better forecasts than those of unadjusted futures, of futures adjusted for the average forecast error and of the random walk, particularly at horizons of more than 6 months. JEL Classification: E37, E44, G13, Q4

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 0999.

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Date of creation: Jan 2009
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Handle: RePEc:ecb:ecbwps:20090999

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Keywords: forecasting; Futures; Oil;

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  1. Todd E. Clark & Michael McCracken, 1999. "Tests of Equal Forecast Accuracy and Encompassing for Nested Models," Computing in Economics and Finance 1999 1241, Society for Computational Economics.
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Cited by:
  1. Eduardo Borensztein & Damiano Sandri & Olivier Jeanne, 2009. "Macro-Hedging for Commodity Exporters," IMF Working Papers 09/229, International Monetary Fund.
  2. Ron Alquist & Lutz Kilian, 2010. "What do we learn from the price of crude oil futures?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 25(4), pages 539-573.
  3. Melolinna, Marko, 2011. "What explains risk premia in crude oil futures?," Research Discussion Papers 2/2011, Bank of Finland.
  4. A. Anzuini & M. J. Lombardi & P. Pagano, 2013. "The Impact of Monetary Policy Shocks on Commodity Prices," International Journal of Central Banking, International Journal of Central Banking, vol. 9(3), pages 125-150, September.
  5. Nixon, Dan & Smith, Tom, 2012. "What can the oil futures curve tell us about the outlook for oil prices?," Bank of England Quarterly Bulletin, Bank of England, vol. 52(1), pages 39-47.
  6. Alessio Anzuini & Patrizio Pagano & Massimiliano Pisani, 2013. "Macroeconomic effects of precautionary demand for oil," Temi di discussione (Economic working papers) 918, Bank of Italy, Economic Research and International Relations Area.
  7. Alessio Anzuini & Patrizio Pagano & Massimiliano Pisani, 2007. "Oil supply news in a VAR: Information from financial markets," Temi di discussione (Economic working papers) 632, Bank of Italy, Economic Research and International Relations Area.

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