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Forecasting Energy Commodity Prices: A Large Global Dataset Sparse Approach

Davide Ferrari (), Francesco Ravazzolo () and Joaquin Vespignani ()
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Davide Ferrari: Free University of Bozen-Bolzano, Italy

No BEMPS83, BEMPS - Bozen Economics & Management Paper Series from Faculty of Economics and Management at the Free University of Bozen

Abstract: This paper focuses on forecasting quarterly nominal global energy prices of commodities, such as oil, gas and coal, using the Global VAR dataset proposed by Mohaddes and Raissi (2018). This dataset includes a number of potentially informative quarterly macroeconomic variables for the 33 largest economies, overall accounting for more than 80% of the global GDP. To deal with the information on this large database, we apply dynamic factor models based on a penalized maximum likelihood approach that allows to shrink parameters to zero and to estimate sparse factor loadings. The estimated latent factors show considerable sparsity and heterogeneity in the selected loadings across variables. When the model is extended to predict energy commodity prices up to four periods ahead, results indicate larger predictability relative to the benchmark random walk model for 1-quarter ahead for all energy commodities and up to 4 quarters ahead for gas prices. Our model also provides superior forecasts than machine learning techniques, such as elastic net, LASSO and random forest, applied to the same database.

Keywords: Energy Prices; Forecasting; Dynamic Factor model; Sparse Estimation; Penalized Maximum Likelihood. (search for similar items in EconPapers)
JEL-codes: C1 C5 C8 E3 Q4 (search for similar items in EconPapers)
Pages: [28 pages]
Date: 2021-04
New Economics Papers: this item is included in nep-big, nep-ene, nep-for and nep-mac
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Related works:
Journal Article: Forecasting energy commodity prices: A large global dataset sparse approach (2021) Downloads
Working Paper: Forecasting Energy Commodity Prices: A Large Global Dataset Sparse Approach (2019) Downloads
Working Paper: Forecasting energy commodity prices: A large global dataset sparse approach (2019) Downloads
Working Paper: Forecasting Energy Commodity Prices: A Large Global Dataset Sparse Approach (2019) Downloads
Working Paper: Forecasting energy commodity prices: a large global dataset sparse approach (2019) Downloads
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