A General Approach to Recovering Market Expectations from Futures Prices with an Application to Crude Oil

Christiane Baumeister and Lutz Kilian

No 5782, CESifo Working Paper Series from CESifo

Abstract: Futures markets are a potentially valuable source of information about price expectations. Exploiting this information has proved difficult in practice, because time-varying risk premia often render the futures price a poor measure of the market expectation of the price of the underlying asset. Although this expectation in principle may be recovered by adjusting the futures price by the estimated risk premium, a common problem is that there are as many measures of the market expectation as there are estimates of the risk premium. We propose a general solution to this problem that allows us to select the most accurate estimate of the expectation for any set of risk premium estimates. We illustrate this approach by solving the long-standing problem of how to estimate the market expectation of the price of crude oil. We provide a new measure of oil price expectations that is substantially more accurate than the alternatives and more economically plausible. Our analysis has implications for the estimation of economic models of energy-intensive durables, for oil price forecasting, and for the measurement of oil price shocks.

Keywords: futures; risk premium; market expectation; model uncertainty; forecast; oil price (search for similar items in EconPapers)
JEL-codes: C53 D84 G14 Q43 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (21)

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Related works:
Working Paper: A General Approach to Recovering Market Expectations from Futures Prices with an Application to Crude Oil (2016)
Working Paper: A General Approach to Recovering Market Expectations from Futures Prices With an Application to Crude Oil (2014)
Working Paper: A general approach to recovering market expectations from futures prices with an application to crude oil (2014)
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