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Risk-Adjusted Forecasts of Oil Prices

  • Patrizio Pagano


    (Bank of Italy, Economic Research Department)

  • Massimiliano Pisani


    (Bank of Italy, Economic Research Department)

This paper documents the existence of a significant forecast error on crude oil futures, particularly evident since the mid-1990s, which is negative on average and displays a non-trivial cyclical component (risk premium). We show that the forecast error on oil futures could have been explained in part by means of real-time US business cycle indicators, such as the degree of utilized capacity in manufacturing. An out-of-the-sample prediction exercise reveals that futures which are adjusted to take into account this time-varying component produce significantly better forecasts than those of the unadjusted futures and random walk, particularly at horizons of more than 6 months.

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Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 585.

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Date of creation: Mar 2006
Date of revision:
Handle: RePEc:bdi:wptemi:td_585_06
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