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Forecasting Oil Price Movements: Exploiting the Information in the Future Market

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Author Info
Andrea Coppola () (University of Rome .Tor Vergata.)

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Abstract

Relying on the cost of carry model, we investigate the long-run relationship between spot and futures prices and use the information implied in these cointegrating relationships to forecast out of sample oil spot and futures price movements. In order to forecast oil price movements, we employ a Vector Error Correction Model (VECM), where the deviations from the long-run relationships between spot and futures prices constitute the equilibrium error. In order to evaluate forecasting performance we use the Random Walk Model (RWM) as a benchmark. We .nd that: (i) in-sample, the information in the futures market can explain a sizeable portion of oil price movements; (ii) out-of-sample, the VECM is able to beat the random walk model, both in terms of point forecasting and in terms of market timing ability

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Publisher Info
Paper provided by Tor Vergata University, CEIS in its series CEIS Research Paper with number 100.

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Length: 29
Date of creation: 05 Mar 2007
Date of revision:
Handle: RePEc:rtv:ceisrp:100

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Postal: CEIS - Centre for Economic and International Studies - Faculty of Economics - University of Rome "Tor Vergata" - Via Columbia, 2 00133 Roma
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Postal: CEIS - Centre for Economic and International Studies - Faculty of Economics - University of Rome "Tor Vergata" - Via Columbia, 2 00133 Roma
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Web: http://www.ceistorvergata.it

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Related research
Keywords: crude oil; futures market; forecasting.;

Find related papers by JEL classification:
G1 - Financial Economics - - General Financial Markets
Q3 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation
Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy

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