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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
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Handle: RePEc:bdi:wptemi:td_585_06
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  1. Bailey, Warren & Chang, K C, 1993. " Macroeconomic Influences and the Variability of the Commodity Futures Basis," Journal of Finance, American Finance Association, vol. 48(2), pages 555-73, June.
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  3. Carlos Coimbra & Paulo Soares Esteves, 2004. "Oil prices assumptions in macroeconomic forecasts: should we follow futures market expectations?," Working Papers w200404, Banco de Portugal, Economics and Research Department.
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  17. John H. Cochrane & Monika Piazzesi, 2005. "Bond Risk Premia," American Economic Review, American Economic Association, vol. 95(1), pages 138-160, March.
  18. Robert S. Pindyck, 2001. "The Dynamics of Commodity Spot and Futures Markets: A Primer," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 1-30.
  19. Sergey V. Chernenko, 2004. "The information content of forward and futures prices: market expectations and the price of risk," International Finance Discussion Papers 808, Board of Governors of the Federal Reserve System (U.S.).
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