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Do Commodity Futures Help Forecast Spot Prices?

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  • David A Reichsfeld
  • Shaun K. Roache
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    Abstract

    We assess the spot price forecasting performance of 10 commodity futures at various horizons up to two years and test whether this performance is affected by market conditions. We reject efficient markets based on in-sample tests but, out-of-sample, we find that the forecast from the futures market is hard to beat. We find that the forecasting performance of futures does not depend on the slope of the futures curve, in contrast to the predictions of well-known models of commodity markets. We also find futures'' forecasting performance to be invariant to whether prices are in an upswing or downswing, casting doubt on aspersions that uninformed investors participating during bull markets impede the price discovery process.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 11/254.

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    Length: 25
    Date of creation: 01 Nov 2011
    Date of revision:
    Handle: RePEc:imf:imfwpa:11/254

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    Related research

    Keywords: Commodity markets; Commodity prices; Economic forecasting; Forecasting models; futures price; futures prices; forecasting; random walk; futures markets; backwardation; statistics; standard error; dummy variable; prediction; futures market; statistic; equation; commodity futures; futures contract; time series; standard errors; correlation; futures contracts; cointegration; contango; mean square; bayesian information criteria; commodity futures price; equations; independent variables; predictions; commodity futures prices; polynomial; samples; commodities futures markets; significance level; explanatory power; nonlinearity; commodities futures; bayesian information criterion; covariance; statistical significance; econometrics; constant term; financial markets; probability; exponential smoothing; consistent estimate; oil futures; international finance;

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    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    1. Nese Erbil & Shaun K. Roache, 2010. "How Commodity Price Curves and Inventories React to a Short-Run Scarcity Shock," IMF Working Papers 10/222, International Monetary Fund.
    2. Williams,Jeffrey C. & Wright,Brian D., 2005. "Storage and Commodity Markets," Cambridge Books, Cambridge University Press, number 9780521023399, October.
    3. Vansteenkiste, Isabel, 2011. "What is driving oil futures prices? Fundamentals versus speculation," Working Paper Series 1371, European Central Bank.
    4. C. John McDermott & Paul Cashin & Alasdair Scott, 1999. "Booms and Slumps in World Commodity Prices," IMF Working Papers 99/155, International Monetary Fund.
    5. Menzie D. Chinn & Olivier Coibion, 2010. "The Predictive Content of Commodity Futures," NBER Working Papers 15830, 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. Trevor A. Reeve & Robert J. Vigfusson, 2011. "Evaluating the forecasting performance of commodity futures prices," International Finance Discussion Papers 1025, Board of Governors of the Federal Reserve System (U.S.).
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