Commodity price forecasts and futures prices
The International Commodity Markets Division (CM) of the World Bank started forecasting primary commodity prices more than two decades ago. The forecast accuracy, or forecast biases and informational efficiency, has been a major concern and the subject of occasional retrospective studies. This paper explores the relationship between commodity futures prices and price expectations. It focuses of the usefulness of futures prices as a short-term price forecasting tool. In 1989, Froot and Frankel used survey data on exchange rate expectations to estimate the relative importance of risk premium and expectational error in explaining the forward discount biases in foreign exchange rates. They found that expectational errors dominate the forward discount bias and that the risk premium is small, relatively stable, and not correlated with the expectational error. This paper follows the Froot and Frankel analysis to see if commodity prices exhibit similar characteristics. It goes a step further and estimates a relationship between futures prices and price expectations. The paper summarizes the characteristics of the forecast and futures price data, tests the rationality of futures prices and decomposes the futures price bias. It also conducts direct statistical tests of the importance of risk premium and expectational error.
|Date of creation:||30 Jun 1990|
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- Kenneth A. Froot and Jeffrey A. Frankel., 1988.
"Forward Discount Bias: Is It an Exchange Risk Premium?,"
Economics Working Papers
8874, University of California at Berkeley.
- Kenneth A. Froot & Jeffrey A. Frankel, 1989. "Forward Discount Bias: Is it an Exchange Risk Premium?," The Quarterly Journal of Economics, Oxford University Press, vol. 104(1), pages 139-161.
- Froot, Kenneth A. & Frankel, Jeffrey A., 1988. "Forward Discount Bias: Is It an Exchange Risk Premium?," Department of Economics, Working Paper Series qt5w65g4zg, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
- Danthine, Jean-Pierre, 1978. "Information, futures prices, and stabilizing speculation," Journal of Economic Theory, Elsevier, vol. 17(1), pages 79-98, February.
- Turnovsky, Stephen J, 1983. "The Determination of Spot and Futures Prices with Storable Commodities," Econometrica, Econometric Society, vol. 51(5), pages 1363-87, September.
- Gregory Mankiw, N. & Shapiro, Matthew D., 1986.
"Do we reject too often? : Small sample properties of tests of rational expectations models,"
Elsevier, vol. 20(2), pages 139-145.
- N. Gregory Mankiw & Matthew D. Shapiro, 1985. "Do We Reject Too Often? Small Sample Properties of Tests of Rational Expectations Models," NBER Technical Working Papers 0051, National Bureau of Economic Research, Inc.
- Dokko, Yoon & Edelstein, Robert H, 1989. "How Well Do Economists Forecast Stock Market Prices? A Study of the Livingston Surveys," American Economic Review, American Economic Association, vol. 79(4), pages 865-71, September.
- Warr, Peter G., 1990.
"Predictive performance of the World Bank's commodity price projections,"
Agricultural Economics of Agricultural Economists,
International Association of Agricultural Economists, vol. 4(3-4), December.
- Warr, Peter G., 1990. "Predictive performance of the World Bank's commodity price projections," Agricultural Economics, Blackwell, vol. 4(3-4), pages 365-379, December.
- Hansen, Lars Peter & Hodrick, Robert J, 1980. "Forward Exchange Rates as Optimal Predictors of Future Spot Rates: An Econometric Analysis," Journal of Political Economy, University of Chicago Press, vol. 88(5), pages 829-53, October.
- Lewis, Karen K, 1989. "Changing Beliefs and Systematic Rational Forecast Errors with Evidence from Foreign Exchange," American Economic Review, American Economic Association, vol. 79(4), pages 621-36, September.
- Ronald Britto, 1984. "The Simultaneous Determination of Spot and Futures Prices in a Simple Model with Production Risk," The Quarterly Journal of Economics, Oxford University Press, vol. 99(2), pages 351-365.
- Fama, Eugene F., 1984. "Forward and spot exchange rates," Journal of Monetary Economics, Elsevier, vol. 14(3), pages 319-338, November.
- Boum-Jong Choe, 1990. "Rational expectations and commodity price forecasts," Policy Research Working Paper Series 435, The World Bank.
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