The Second RP-PCA Factor and Crude Oil Price Predictability

Qi Shi

Prague Economic Papers, 2024, vol. 2024, issue 6, 662-690

Abstract: Although it is notoriously difficult to utilize financial ratios to forecast the crude oil market prices, our study challenges this perception and reveals that the second risk premium principal component analysis (RP-PCA) factor may contain statistically significant information for both in-sample and out-of-sample forecasts of future crude oil prices. Our evidence illustrates that the second RP-PCA factor substantially outperforms many other popular predictors (approximately 30 conventional predictors) in forecasting crude oil prices and generating adequate higher values of economic profits. We conduct a range of informative tests, including bootstrap simulation, success ratio tests, alternative out-of-sample evaluation periods, and structure break tests. Furthermore, we illustrate that the forecasting ability of the second RP-PCA factor may stem from its ability to forecast oil market sentiment. Our study presents a novel and indicatable financial instrument for policymakers to predict crude oil prices robustly. The theoretical motivation of this study links to Cochrane's (2005) framework for general candidate factors in asset pricing.

Keywords: RP-PCA factor; forecasting; crude oil prices; economic profits; oil market sentiment; policymakers (search for similar items in EconPapers)
JEL-codes: C53 G12 G17 Q47 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://pep.vse.cz/doi/10.18267/j.pep.879.html (text/html)
http://pep.vse.cz/doi/10.18267/j.pep.879.pdf (application/pdf)
free of charge

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:prg:jnlpep:v:2024:y:2024:i:6:id:879:p:662-690

Ordering information: This journal article can be ordered from
Editorial office Prague Economic Papers, University of Economics, nám. W. Churchilla 4, 130 67 Praha 3, Czech Republic
http://pep.vse.cz

DOI: 10.18267/j.pep.879

Access Statistics for this article

Prague Economic Papers is currently edited by Klára Pavlová

More articles in Prague Economic Papers from Prague University of Economics and Business Contact information at EDIRC.
Bibliographic data for series maintained by Stanislav Vojir ().