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Risk-adjusted forecasts of oil prices

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  • Pagano, Patrizio
  • Pisani, Massimiliano

Abstract

This paper documents the existence of a significant forecast error on crude oil futures. We interpret it as a risk premium, which, in part, could have been explained by means of a real-time US business cycle indicator, such as the degree of capacity utilization in manufacturing. This result is robust to the specification of the estimating equation and to the considered business cycle indicator. An out-of-the-sample prediction exercise reveals that futures adjusted to take into account this time-varying component produce significantly better forecasts than those of unadjusted futures, of futures adjusted for the average forecast error and of the random walk, particularly at horizons of more than 6 months. JEL Classification: E37, E44, G13, Q4

Suggested Citation

  • Pagano, Patrizio & Pisani, Massimiliano, 2009. "Risk-adjusted forecasts of oil prices," Working Paper Series 999, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:2009999
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    Cited by:

    1. 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.
    2. Valenti, Daniele & Manera, Matteo & Sbuelz, Alessandro, 2020. "Interpreting the oil risk premium: Do oil price shocks matter?," Energy Economics, Elsevier, vol. 91(C).
    3. A. Anzuini & M. J. Lombardi & P. Pagano, 2013. "The Impact of Monetary Policy Shocks on Commodity Prices," International Journal of Central Banking, International Journal of Central Banking, vol. 9(3), pages 125-150, September.
    4. Kilian, Lutz & Baumeister, Christiane, 2014. "A General Approach to Recovering Market Expectations from Futures Prices With an Application to Crude Oil," CEPR Discussion Papers 10162, C.E.P.R. Discussion Papers.
    5. Hollstein, Fabian & Prokopczuk, Marcel & Tharann, Björn & Wese Simen, Chardin, 2021. "Predictability in commodity markets: Evidence from more than a century," Journal of Commodity Markets, Elsevier, vol. 24(C).
    6. Alessio Anzuini & Patrizio Pagano & Massimiliano Pisani, 2015. "Macroeconomic Effects of Precautionary Demand for Oil," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 30(6), pages 968-986, September.
    7. Tien-Yu Chiu & Shwu-Jane Shieh, 2009. "Regime-Switched Volatility Of Brent Crude Oil Futures With Markov-Switching Arch Model," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 12(02), pages 113-124.
    8. Van Robays, Ine & Belu Mănescu, Cristiana, 2014. "Forecasting the Brent oil price: addressing time-variation in forecast performance," Working Paper Series 1735, European Central Bank.
    9. Christiane Baumeister, 2021. "Measuring Market Expectations," Working Papers 202163, University of Pretoria, Department of Economics.
    10. Jean-Marc Fournier & Isabell Koske & Isabelle Wanner & Vera Zipperer, 2013. "The Price of Oil – Will it Start Rising Again?," OECD Economics Department Working Papers 1031, OECD Publishing.
    11. Borensztein, Eduardo & Jeanne, Olivier & Sandri, Damiano, 2013. "Macro-hedging for commodity exporters," Journal of Development Economics, Elsevier, vol. 101(C), pages 105-116.
    12. Gambetti, Luca & Moretti, Laura, 2017. "News, Noise and Oil Price Swings," Research Technical Papers 12/RT/17, Central Bank of Ireland.
    13. John Cotter & Emmanuel Eyiah-Donkor & Valerio Potì, 2020. "Commodity Futures Return Predictability and Intertemporal Asset Pricing," Working Papers 202011, Geary Institute, University College Dublin.
    14. Bredin, Don & O'Sullivan, Conall & Spencer, Simon, 2021. "Forecasting WTI crude oil futures returns: Does the term structure help?," Energy Economics, Elsevier, vol. 100(C).
    15. Nixon, Dan & Smith, Tom, 2012. "What can the oil futures curve tell us about the outlook for oil prices?," Bank of England Quarterly Bulletin, Bank of England, vol. 52(1), pages 39-47.
    16. Clostermann, Jörg & Keis, Nikolaus & Seitz, Franz, 2010. "Short-term oil models before and during the financial market crisis," Arbeitsberichte – Working Papers 18, Technische Hochschule Ingolstadt (THI).
    17. Thomas A. Knetsch, 2007. "Forecasting the price of crude oil via convenience yield predictions," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 26(7), pages 527-549.
    18. Maryam Movahedifar & Hossein Hassani & Masoud Yarmohammadi & Mahdi Kalantari & Rangan Gupta, 2021. "A robust approach for outlier imputation: Singular Spectrum Decomposition," Working Papers 202164, University of Pretoria, Department of Economics.
    19. Funk, Christoph, 2018. "Forecasting the real price of oil - Time-variation and forecast combination," Energy Economics, Elsevier, vol. 76(C), pages 288-302.
    20. Alessio Anzuini & Patrizio Pagano & Massimiliano Pisani, 2007. "Oil supply news in a VAR: Information from financial markets," Temi di discussione (Economic working papers) 632, Bank of Italy, Economic Research and International Relations Area.
    21. Cotter, John & Eyiah-Donkor, Emmanuel & Potì, Valerio, 2023. "Commodity futures return predictability and intertemporal asset pricing," Journal of Commodity Markets, Elsevier, vol. 31(C).

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    More about this item

    Keywords

    forecasting; Futures.; Oil;
    All these keywords.

    JEL classification:

    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy

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