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Bond yield and crude oil prices predictability

Zhifeng Dai and Jie Kang

Energy Economics, 2021, vol. 97, issue C

Abstract: Using long-term government bond yield (LTY), corporate bond yields spread (DFY) and Treasury bill rate (TBL) as the proxies, we find bond yield can effectively predict WTI and Brent spot prices. In-sample analysis indicates that bond yield variables have substantial explanatory power on oil returns, and there are significant Granger causality relationships from LTY and DFY to oil returns. In out-of-sample forecast, bond yield variables defeat historical average benchmark as well as the competing predictors from both statistical and economic perspectives. Moreover, the predictive abilities of bond yield variables can be tremendously enhanced with multivariate prediction methods. We prove that the prediction power of bond yield variables partially stems from their abilities on capturing oil market sentiment. Our findings survive a series of robustness checks.

Keywords: Bond yield; Oil prices predictability; Predictive regression; Out-of-sample forecasting; Asset allocation (search for similar items in EconPapers)
JEL-codes: C53 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:97:y:2021:i:c:s0140988321001109

DOI: 10.1016/j.eneco.2021.105205

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Energy Economics is currently edited by R. S. J. Tol, Beng Ang, Lance Bachmeier, Perry Sadorsky, Ugur Soytas and J. P. Weyant

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