Forecasting the real price of oil in a changing world: A forecast combination approach

Christiane Baumeister and Lutz Kilian

No 2013/11, CFS Working Paper Series from Center for Financial Studies (CFS)

Abstract: The U.S. Energy Information Administration (EIA) regularly publishes monthly and quarterly forecasts of the price of crude oil for horizons up to two years, which are widely used by practitioners. Traditionally, such out-of-sample forecasts have been largely judgmental, making them difficult to replicate and justify. An alternative is the use of real-time econometric oil price forecasting models. We investigate the merits of constructing combinations of six such models. Forecast combinations have received little attention in the oil price forecasting literature to date. We demonstrate that over the last 20 years suitably constructed real-time forecast combinations would have been systematically more accurate than the no-change forecast at horizons up to 6 quarters or 18 months. MSPE reduction may be as high as 12% and directional accuracy as high as 72%. The gains in accuracy are robust over time. In contrast, the EIA oil price forecasts not only tend to be less accurate than no-change forecasts, but are much less accurate than our preferred forecast combination. Moreover, including EIA forecasts in the forecast combination systematically lowers the accuracy of the combination forecast. We conclude that suitably constructed forecast combinations should replace traditional judgmental forecasts of the price of oil.

Keywords: forecast combination; real-time data; model misspecification; structural change; oil price (search for similar items in EconPapers)
JEL-codes: C53 E32 Q43 (search for similar items in EconPapers)
Date: 2013
New Economics Papers: this item is included in nep-ene, nep-for and nep-mac
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Citations: View citations in EconPapers (9)

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Related works:
Journal Article: Forecasting the Real Price of Oil in a Changing World: A Forecast Combination Approach (2015)
Working Paper: Forecasting the Real Price of Oil in a Changing World: A Forecast Combination Approach (2013)
Working Paper: Forecasting the Real Price of Oil in a Changing World: A Forecast Combination Approach (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:cfswop:201311

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