 Forecasting crude oil futures market returns: A principal component analysis combination approachInternational Journal of Forecasting, 2023, vol. 39, issue 2, 659-673 Abstract: To improve the predictability of crude oil futures market returns, this paper proposes a new combination approach based on principal component analysis (PCA). The PCA combination approach combines individual forecasts given by all PCA subset regression models that use all potential predictor subsets to construct PCA indexes. The proposed method can not only guard against over-fitting by employing the PCA technique but also reduce forecast variance due to extensive forecast combinations, thus benefiting from both the combination of information and the combination of forecasts. Showing impressive out-of-sample forecasting performance, the PCA combination approach outperforms a benchmark model and many related competing models. Furthermore, a mean–variance investor can realize sizeable utility gains by using the PCA combination forecasts relative to the competing forecasts from an asset allocation perspective. Keywords: Crude oil futures market; Return predictability; Principal component analysis; Forecast combination; Subset regression (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:intfor:v:39:y:2023:i:2:p:659-673 DOI: 10.1016/j.ijforecast.2022.01.010 Access Statistics for this article International Journal of Forecasting is currently edited by R. J. Hyndman More articles in International Journal of Forecasting from Elsevier |
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