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What do we learn from the price of crude oil futures?*

* This paper has been replicated

Author

Listed:
  • Ron Alquist

    (International Department, Bank of Canada, Ottawa, Canada)

  • Lutz Kilian

Abstract

Despite their widespread use as predictors of the spot price of oil, oil futures prices tend to be less accurate in the mean-squared prediction error sense than no-change forecasts. This result is driven by the variability of the futures price about the spot price, as captured by the oil futures spread. This variability can be explained by the marginal convenience yield of oil inventories. Using a two-country, multi-period general equilibrium model of the spot and futures markets for crude oil we show that increased uncertainty about future oil supply shortfalls under plausible assumptions causes the spread to decline. Increased uncertainty also causes precautionary demand for oil to increase, resulting in an immediate increase in the real spot price. Thus the negative of the oil futures spread may be viewed as an indicator of fluctuations in the price of crude oil driven by precautionary demand. An empirical analysis of this indicator provides evidence of how shifts in the uncertainty about future oil supply shortfalls affect the real spot price of crude oil. Copyright © 2010 John Wiley & Sons, Ltd.

Suggested Citation

  • Ron Alquist & Lutz Kilian, 2010. "What do we learn from the price of crude oil futures?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 25(4), pages 539-573.
    • Handle: RePEc:jae:japmet:v:25:y:2010:i:4:p:539-573
    DOI: 10.1002/jae.1159
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    Replication

    This item has been replicated by:
  • Anton Pak, 2018. "Predicting crude oil prices: Replication of the empirical results in “What do we learn from the price of crude oil?”," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 33(1), pages 160-163, January.

    • More about this item

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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