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Commodity prices, commodity currencies, and global economic developments

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  • Jan J. J. Groen
  • Paolo A. Pesenti

Abstract

In this paper, we seek to produce forecasts of commodity price movements that can systematically improve on naive statistical benchmarks. We revisit how well changes in commodity currencies perform as potential 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 the more novel 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, of all the approaches, the exchange-rate-based model and the PLS factor-augmented model are more likely to outperform the naive statistical benchmarks, although PLS factor-augmented models usually have a slight edge over the exchange-rate-based approach. 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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Bibliographic Info

Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 387.

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Date of creation: 2009
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Handle: RePEc:fip:fednsr:387

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Related research

Keywords: Commodity exchanges ; Foreign exchange rates ; Commodity futures ; Regression analysis ; Forecasting;

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References

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  1. Elekdag, Selim & Lalonde, Rene & Laxton, Doug & Muir, Dirk & Pesenti, Paolo, 2008. "Oil Price Movements and the Global Economy: A Model-Based Assessment," CEPR Discussion Papers 6700, C.E.P.R. Discussion Papers.
  2. 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.
  3. Yu-chin Chen & Kenneth Rogoff & Barbara Rossi, 2010. "Can Exchange Rates Forecast Commodity Prices?," Working Papers 10-07, Duke University, Department of Economics.
  4. Reinhart, Carmen, 1988. "Real Exchange Rate and Commodity Prices in a Neoclassical Model," MPRA Paper 13188, University Library of Munich, Germany.
  5. Jan J. J. Groen & George Kapetanios, 2009. "Model selection criteria for factor-augmented regressions," Staff Reports 363, Federal Reserve Bank of New York.
  6. Eduardo Borensztein & Carmen Reinhart, 1994. "The Macroeconomic Determinants of Commodity Prices," IMF Working Papers 94/9, International Monetary Fund.
  7. Jean Boivin & Serena Ng, 2003. "Are More Data Always Better for Factor Analysis?," NBER Working Papers 9829, National Bureau of Economic Research, Inc.
  8. Q. Farooq Akram, 2008. "Commodity prices, interest rates and the dollar," Working Paper 2008/12, Norges Bank.
  9. 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.
  10. 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.
  11. Todd E. Clark & Kenneth D. West, 2005. "Approximately normal tests for equal predictive accuracy in nested models," Research Working Paper RWP 05-05, Federal Reserve Bank of Kansas City.
  12. Aasim M. Husain & Chakriya Bowman, 2004. "Forecasting Commodity Prices: Futures Versus Judgment," IMF Working Papers 04/41, International Monetary Fund.
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Cited by:
  1. Chen, Yu-chin & Rogoff, Kenneth & Rossi, Barbara, 2008. "Can Exchange Rates Forecast Commodity Prices?," Working Papers 08-03, Duke University, Department of Economics.
  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.

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