Commodity prices and related equity prices

Shiu-Sheng Chen

Canadian Journal of Economics, 2016, vol. 49, issue 3, 949-967

Abstract: This paper shows that commodity-sensitive stock price indices have strong power in predicting nominal and real commodity prices at short horizons (one-month-ahead predictions) using both in- and out-of-sample tests. The forecasts based on commodity-sensitive stock price indices are able to significantly outperform naïve no-change forecasts. For example, the one-month-ahead forecasts for nominal commodity prices reduce the mean squared prediction error by between 1.5% (for natural gas prices) and 20% (for copper prices). Moreover, the one-month-ahead directional forecast is found to perform significantly better than a 50:50 coin toss. As stock prices are not subject to revision, the proposed variable, which reflects timely and readily available market information, can potentially be a valuable predictor and thereby help to improve the accuracy of commodity price forecasts.

JEL-codes: F37 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (6)

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