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Forecasting Base Metal Prices with an International Stock Index

Author

Listed:
  • Pincheira, Pablo
  • Hardy, Nicolas
  • Bentancor, Andrea
  • Henriquez, Cristóbal
  • Tapia, Ignacio

Abstract

In this paper we show that the MSCI ACWI Metals and Mining Index has the ability to predict base metal prices. We use both in-sample and out-of-sample exercises to conduct such examination. The theoretical underpinning of these results relies on the present-value model for stock-price determination. This model has the implication of Granger causality from stock prices to their key determinants. In the case of metal and mining producers, one of the key elements determining the value of these firms is the price of the commodity they produce and export. Our results are consistent with this theoretical framework, as forecasts based on a model including the MSCI index outperform, in terms of Mean Squared Prediction Error, forecasts that do not use the information contained in that index.

Suggested Citation

  • Pincheira, Pablo & Hardy, Nicolas & Bentancor, Andrea & Henriquez, Cristóbal & Tapia, Ignacio, 2021. "Forecasting Base Metal Prices with an International Stock Index," MPRA Paper 107828, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:107828
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    References listed on IDEAS

    as
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    9. Pincheira, Pablo & Hardy, Nicolás, 2021. "Forecasting aluminum prices with commodity currencies," Resources Policy, Elsevier, vol. 73(C).
    10. Pincheira, Pablo M. & West, Kenneth D., 2016. "A comparison of some out-of-sample tests of predictability in iterated multi-step-ahead forecasts," Research in Economics, Elsevier, vol. 70(2), pages 304-319.
    11. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 33(1), pages 125-132.
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    14. Pincheira, Pablo & Hardy, Nicolas, 2018. "The predictive relationship between exchange rate expectations and base metal prices," MPRA Paper 89423, University Library of Munich, Germany.
    15. Clark, Todd E. & McCracken, Michael W., 2001. "Tests of equal forecast accuracy and encompassing for nested models," Journal of Econometrics, Elsevier, vol. 105(1), pages 85-110, November.
    16. Pablo M. Pincheira & Carlos A. Medel, 2015. "Forecasting Inflation with a Simple and Accurate Benchmark: The Case of the US and a Set of Inflation Targeting Countries," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 65(1), pages 2-29, January.
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    18. Diebold, Francis X & Mariano, Roberto S, 2002. "Comparing Predictive Accuracy," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 134-144, January.
    19. Pablo Matias Pincheira Brown, 2013. "Shrinkage‐Based Tests of Predictability," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 32(4), pages 307-332, July.
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    More about this item

    Keywords

    Forecasting; commodities; base metals; univariate time-series models; out-of-sample comparison; base metal equity securities.;
    All these keywords.

    JEL classification:

    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C2 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C4 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling
    • E0 - Macroeconomics and Monetary Economics - - General
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • F3 - International Economics - - International Finance
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles
    • F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation: Models and Applications
    • G0 - Financial Economics - - General
    • G1 - Financial Economics - - General Financial Markets
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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