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

  • Stefan Reitz


    (Deutsche Bundesbank)

  • Jan C. Rülke


    (WHU Vallendar)

  • Georg Stadtmann


    (European University Viadrina)

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’ underperformance 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 naive 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 Justus-Liebig University Giessen, Department of Statistics and Economics in its journal Journal of Economics and Statistics.

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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