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Regressive Oil Price Expectations Toward More Fundamental Values of the Oil Price

  • Reitz Stefan

    ()

    (Deutsche Bundesbank, Wilhelm-Epstein-Straße 14, 60431 Frankfurt a.M., Germany)

  • Rülke Jan-Christoph

    ()

    (Department of Economics, WHU – Otto Beisheim School of Management, Burgplatz 2, 56179 Vallendar, Germany)

  • Stadtmann Georg

    ()

    (European University Viadrina, August-Bebel-Straße 12, Postfach 1786, 15207 Frankfurt (Oder), Germany, and University of Southern Denmark, Campusvej 55, 5230 Odense M, Denmark)

We use oil price forecasts from the Consensus Economic Forecast poll for the time period Oct. 1989 - Dec. 2008 to analyze how forecasters form their expectations. Our findings indicate that the extrapolative as well as the regressive expectation formation hypothesis play a role. Standard measures of forecast accuracy reveal forecasters’ under performance relative to the random walk benchmark. We test the hypothesis of rational expectations by relying on the criteria of unbiasedness and orthogonality. Although both conditions are met, the forecast accuracy is significantly lower compared to naïve random walk forecast. The forecasters have problems to forecast the trends in the oil price. The recent roller-coaster movements in the international oil market have revealed forecasters’ inability to predict major trends in the spot oil price. As a consequence, some research institutes have stopped forecasting the oil price as an ingredient of their macroeconomic models and use a random walk forecast instead.

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Article provided by De Gruyter in its journal Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik).

Volume (Year): 230 (2010)
Issue (Month): 4 (August)
Pages: 454-466

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Handle: RePEc:jns:jbstat:v:230:y:2010:i:4:p:454-466
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