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Commodity prices, commodity currencies, and global economic developments

  • Jan J. J. Groen
  • Paolo A. Pesenti

In this paper we seek to produce forecasts of commodity price movements that can systematically improve on naive statistical benchmarks, and revisit the forecasting performance of changes in commodity currencies as efficient predictors of commodity prices, a view emphasized in the recent literature. In addition, we consider different types of factor-augmented models that use information from a large data set containing a variety of indicators of supply and demand conditions across major developed and developing countries. These factor-augmented models use either standard principal components or partial least squares (PLS) regression to extract dynamic factors from the data set. Our forecasting analysis considers ten alternative indices and sub-indices of spot prices for three different commodity classes across different periods. We find that the exchange rate-based model and especially the PLS factor-augmented model are more prone to outperform the naive statistical benchmarks. However, across our range of commodity price indices we are not able to generate out-of-sample forecasts that, on average, are systematically more accurate than predictions based on a random walk or autoregressive specifications.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15743.

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Date of creation: Feb 2010
Date of revision:
Publication status: published as Commodity Prices, Commodity Currencies, and Global Economic Developments , Jan J. J. Groen, Paolo A. Pesenti. in Commodity Prices and Markets, East Asia Seminar on Economics, Volume 20 , Ito and Rose. 2011
Handle: RePEc:nbr:nberwo:15743
Note: IFM
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  1. 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.
  2. Todd E. Clark & Kenneth D. West, 2004. "Using out-of-sample mean squared prediction errors to test the Martingale difference hypothesis," Research Working Paper RWP 04-03, Federal Reserve Bank of Kansas City.
  3. Yu-Chin Chen & Kenneth Rogoff & Barbara Rossi, 2008. "Can Exchange Rates Forecast Commodity Prices?," NBER Working Papers 13901, National Bureau of Economic Research, Inc.
  4. Elekdag, Selim & Lalonde, Rene & Laxton, Doug & Muir, Dirk & Pesenti, Paolo, 2008. "Oil Price Movements and the Global Economy: A Model-Based Assessment," CEPR Discussion Papers 6700, C.E.P.R. Discussion Papers.
  5. Reinhart, Carmen & Borensztein, Eduardo, 1994. "The Macroeconomic Determinants of Commodity Prices," MPRA Paper 6979, University Library of Munich, Germany.
  6. Jan J.J. Groen & George Kapetanios, 2008. "Revisiting Useful Approaches to Data-Rich Macroeconomic Forecasting," Working Papers 624, Queen Mary University of London, School of Economics and Finance.
  7. Lutz Kilian, 2009. "Not All Oil Price Shocks Are Alike: Disentangling Demand and Supply Shocks in the Crude Oil Market," American Economic Review, American Economic Association, vol. 99(3), pages 1053-69, June.
  8. Aasim M. Husain & Chakriya Bowman, 2004. "Forecasting Commodity Prices: Futures Versus Judgment," IMF Working Papers 04/41, International Monetary Fund.
  9. Jan J. J. Groen & George Kapetanios, 2009. "Model selection criteria for factor-augmented regressions," Staff Reports 363, Federal Reserve Bank of New York.
  10. Jean Boivin & Serena Ng, 2003. "Are More Data Always Better for Factor Analysis?," NBER Working Papers 9829, National Bureau of Economic Research, Inc.
  11. Margaret E. Slade & Henry Thille, 2006. "Commodity Spot Prices: An Exploratory Assessment of Market Structure and Forward-Trading Effects," Economica, London School of Economics and Political Science, vol. 73(290), pages 229-256, 05.
  12. Q. Farooq Akram, 2008. "Commodity prices, interest rates and the dollar," Working Paper 2008/12, Norges Bank.
  13. Reinhart, Carmen, 1988. "Real Exchange Rate and Commodity Prices in a Neoclassical Model," MPRA Paper 13188, University Library of Munich, Germany.
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