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

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  • Andrea Coppola

    ()
    (University of Rome .Tor Vergata.)

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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Bibliographic 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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Web: http://www.ceistorvergata.it

Related research

Keywords: crude oil; futures market; forecasting.;

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Cited by:
  1. repec:wyi:wpaper:002040 is not listed on IDEAS
  2. Guglielmo Maria Caporale & Davide Ciferri & Alessandro Girardi, 2010. "Time-Varying Spot and Futures Oil Price Dynamics," CESifo Working Paper Series 3015, CESifo Group Munich.
  3. Prat, Georges & Uctum, Remzi, 2011. "Modelling oil price expectations: Evidence from survey data," The Quarterly Review of Economics and Finance, Elsevier, vol. 51(3), pages 236-247, June.
  4. Vansteenkiste, Isabel, 2011. "What is driving oil futures prices? Fundamentals versus speculation," Working Paper Series 1371, European Central Bank.
  5. Narayan, Paresh Kumar & Narayan, Seema & Sharma, Susan Sunila, 2013. "An analysis of commodity markets: What gain for investors?," Journal of Banking & Finance, Elsevier, vol. 37(10), pages 3878-3889.

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