Evaluating the forecasting performance of commodity futures prices
AbstractCommodity futures prices are frequently criticized as being uninformative for forecasting purposes because (1) they seem to do no better than a random walk or an extrapolation of recent trends and (2) futures prices for commodities often trace out a relatively flat trajectory even though global demand is steadily increasing. In this paper, we attempt to shed light on these concerns by discussing the theoretical relationship between spot and futures prices for commodities and by evaluating the empirical forecasting performance of futures prices relative to some alternative benchmarks. The key results of our analysis are that futures prices have generally outperformed a random walk forecast, but not by a large margin, while both futures and a random walk noticeably outperform a simple extrapolation of recent trends (a random walk with drift). Importantly, however, futures prices, on average, outperform a random walk by a considerable margin when there is a sizeable difference between spot and futures prices.
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Bibliographic InfoPaper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 1025.
Date of creation: 2011
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-AGR-2011-08-29 (Agricultural Economics)
- NEP-ALL-2011-08-29 (All new papers)
- NEP-BEC-2011-08-29 (Business Economics)
- NEP-CBA-2011-08-29 (Central Banking)
- NEP-FOR-2011-08-29 (Forecasting)
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