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Do Commodity Futures Help Forecast Spot Prices?

  • David A Reichsfeld
  • Shaun K. Roache
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    We assess the spot price forecasting performance of 10 commodity futures at various horizons up to two years and test whether this performance is affected by market conditions. We reject efficient markets based on in-sample tests but, out-of-sample, we find that the forecast from the futures market is hard to beat. We find that the forecasting performance of futures does not depend on the slope of the futures curve, in contrast to the predictions of well-known models of commodity markets. We also find futures' forecasting performance to be invariant to whether prices are in an upswing or downswing, casting doubt on aspersions that uninformed investors participating during bull markets impede the price discovery process.

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    Paper provided by International Monetary Fund in its series IMF Working Papers with number 11/254.

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    Length: 25
    Date of creation: 01 Nov 2011
    Date of revision:
    Handle: RePEc:imf:imfwpa:11/254
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    1. C. John McDermott & Paul Cashin & Alasdair Scott, 1999. "Booms and Slumps in World Commodity Prices," IMF Working Papers 99/155, International Monetary Fund.
    2. Menzie D. Chinn & Olivier Coibion, 2010. "The Predictive Content of Commodity Futures," Working Papers 89, Department of Economics, College of William and Mary.
    3. Kenneth D. West & Todd Clark, 2006. "Approximately Normal Tests for Equal Predictive Accuracy in Nested Models," NBER Technical Working Papers 0326, National Bureau of Economic Research, Inc.
    4. Vansteenkiste, Isabel, 2011. "What is driving oil futures prices? Fundamentals versus speculation," Working Paper Series 1371, European Central Bank.
    5. Nese Erbil & Shaun K. Roache, 2010. "How Commodity Price Curves and Inventories React to a Short-Run Scarcity Shock," IMF Working Papers 10/222, International Monetary Fund.
    6. Trevor A. Reeve & Robert J. Vigfusson, 2011. "Evaluating the forecasting performance of commodity futures prices," International Finance Discussion Papers 1025, Board of Governors of the Federal Reserve System (U.S.).
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