Commodity prices, commodity currencies, and global economic developments

Jan Groen and Paolo Pesenti

No 387, Staff Reports from Federal Reserve Bank of New York

Abstract: In this paper, we seek to produce forecasts of commodity price movements that can systematically improve on naive statistical benchmarks. We revisit how well changes in commodity currencies perform as potential 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 the more novel 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, of all the approaches, the exchange-rate-based model and the PLS factor-augmented model are more likely to outperform the naive statistical benchmarks, although PLS factor-augmented models usually have a slight edge over the exchange-rate-based approach. 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.

Keywords: Forecasting; Commodity exchanges; Regression analysis; Foreign exchange rates; Commodity futures (search for similar items in EconPapers)
Date: 2009
New Economics Papers: this item is included in nep-cba, nep-for, nep-ifn and nep-opm
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Citations: View citations in EconPapers (2)

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Related works:
Chapter: Commodity Prices, Commodity Currencies, and Global Economic Developments (2011)
Working Paper: Commodity prices, commodity currencies, and global economic developments (2011)
Working Paper: Commodity prices, commodity currencies, and global economic developments (2010)
Working Paper: Commodity prices, commodity currencies, and global economic developments (2010)
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