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Commodity price forecasts and futures prices

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  • Boum-Jong Choe
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    Abstract

    The International Commodity Markets Division (CM) of the World Bank started forecasting primary commodity prices more than two decades ago. The forecast accuracy, or forecast biases and informational efficiency, has been a major concern and the subject of occasional retrospective studies. This paper explores the relationship between commodity futures prices and price expectations. It focuses of the usefulness of futures prices as a short-term price forecasting tool. In 1989, Froot and Frankel used survey data on exchange rate expectations to estimate the relative importance of risk premium and expectational error in explaining the forward discount biases in foreign exchange rates. They found that expectational errors dominate the forward discount bias and that the risk premium is small, relatively stable, and not correlated with the expectational error. This paper follows the Froot and Frankel analysis to see if commodity prices exhibit similar characteristics. It goes a step further and estimates a relationship between futures prices and price expectations. The paper summarizes the characteristics of the forecast and futures price data, tests the rationality of futures prices and decomposes the futures price bias. It also conducts direct statistical tests of the importance of risk premium and expectational error.

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    Bibliographic Info

    Paper provided by The World Bank in its series Policy Research Working Paper Series with number 436.

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    Date of creation: 30 Jun 1990
    Date of revision:
    Handle: RePEc:wbk:wbrwps:436

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    Related research

    Keywords: Commodities; Access to Markets; Markets and Market Access; Environmental Economics&Policies; Economic Theory&Research;

    References

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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. N. Gregory Mankiw & Matthew D. Shapiro, 1985. "Do We Reject Too Often? Small Sample Properties of Tests of Rational Expectations Models," NBER Technical Working Papers 0051, National Bureau of Economic Research, Inc.
    2. Fama, Eugene F., 1984. "Forward and spot exchange rates," Journal of Monetary Economics, Elsevier, vol. 14(3), pages 319-338, November.
    3. Kenneth A. Froot and Jeffrey A. Frankel., 1988. "Forward Discount Bias: Is It an Exchange Risk Premium?," Economics Working Papers 8874, University of California at Berkeley.
    4. Dokko, Yoon & Edelstein, Robert H, 1989. "How Well Do Economists Forecast Stock Market Prices? A Study of the Livingston Surveys," American Economic Review, American Economic Association, vol. 79(4), pages 865-71, September.
    5. Britto, Ronald, 1984. "The Simultaneous Determination of Spot and Futures Prices in a Simple Model with Production Risk," The Quarterly Journal of Economics, MIT Press, vol. 99(2), pages 351-65, May.
    6. Hansen, Lars Peter & Hodrick, Robert J, 1980. "Forward Exchange Rates as Optimal Predictors of Future Spot Rates: An Econometric Analysis," Journal of Political Economy, University of Chicago Press, vol. 88(5), pages 829-53, October.
    7. Turnovsky, Stephen J, 1983. "The Determination of Spot and Futures Prices with Storable Commodities," Econometrica, Econometric Society, vol. 51(5), pages 1363-87, September.
    8. Danthine, Jean-Pierre, 1978. "Information, futures prices, and stabilizing speculation," Journal of Economic Theory, Elsevier, vol. 17(1), pages 79-98, February.
    9. Boum-Jong Choe, 1990. "Rational expectations and commodity price forecasts," Policy Research Working Paper Series 435, The World Bank.
    10. Lewis, Karen K, 1989. "Changing Beliefs and Systematic Rational Forecast Errors with Evidence from Foreign Exchange," American Economic Review, American Economic Association, vol. 79(4), pages 621-36, September.
    11. Warr, Peter G., 1990. "Predictive performance of the World Bank's commodity price projections," Agricultural Economics, Blackwell, vol. 4(3-4), pages 365-379, December.
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    Cited by:
    1. Sushil Mohan & James Love, 2004. "Coffee futures: role in reducing coffee producers' price risk," Journal of International Development, John Wiley & Sons, Ltd., vol. 16(7), pages 983-1002.

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