Forecasting Base Metal Prices with an International Stock Index

Pablo Pincheira, Nicolas Hardy, Cristobal Henrriquez, Ignacio Tapia and Andrea Bentancor
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Cristobal Henrriquez: School of Economics and Business, Universidad Finis Terrae
Ignacio Tapia: School of Economics and Business, Universidad Finis Terrae
Andrea Bentancor: Facultad de Economía y Negocios, Universidad de Talca

Czech Journal of Economics and Finance (Finance a uver), 2023, vol. 73, issue 3, 277-302

Abstract: In this paper, we show that the MSCI ACWI Metals and Mining Index has the ability to predict base metal returns. We use both in-sample and out-of-sample exercises to conduct such examinations. The theoretical underpinning of these results relies on the present-value model for stock-price determination. This model has the implication of Granger causality from stock prices to their key determinants (fundamentals). In the case of metal and mining producers, one of the key elements determining the value of these firms is the price of the commodity they produce and export. Our results are consistent with this theoretical framework, as forecasts based on a model including the MSCI index outperform forecasts that do not use the information contained in that index. Furthermore, in most of our exercises, models equipped with the MSCI Index fare better than models that use the information of equity indices from major commodity exporting countries. We assess predictive ability considering different criteria, such as Mean Squared Prediction Error, Correlations with the target variable and returns from trading strategies.

Keywords: forecasting; commodities; base metals; univariate time-series models; out-of-sample comparison; base metal equity securities. (search for similar items in EconPapers)
JEL-codes: C52 C53 E27 E37 F37 G17 L74 O18 R31 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (1)

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Working Paper: Forecasting Base Metal Prices with an International Stock Index (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:fau:fauart:v:73:y:2023:i:3:p:277-302

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