Evaluating the forecasting performance of commodity futures prices

Trevor A. Reeve and Robert Vigfusson
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Trevor A. Reeve: https://www.federalreserve.gov/econres/trevor-a-reeve.htm

No 1025, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: Commodity futures prices are frequently criticized as being uninformative for forecasting purposes because (1) they seem to do no better than a random walk or an extrapolation of recent trends and (2) futures prices for commodities often trace out a relatively flat trajectory even though global demand is steadily increasing. In this paper, we attempt to shed light on these concerns by discussing the theoretical relationship between spot and futures prices for commodities and by evaluating the empirical forecasting performance of futures prices relative to some alternative benchmarks. The key results of our analysis are that futures prices have generally outperformed a random walk forecast, but not by a large margin, while both futures and a random walk noticeably outperform a simple extrapolation of recent trends (a random walk with drift). Importantly, however, futures prices, on average, outperform a random walk by a considerable margin when there is a sizeable difference between spot and futures prices.

Keywords: Commodity futures; futures markets; Prices; Economic forecasting (search for similar items in EconPapers)
Date: 2011
New Economics Papers: this item is included in nep-agr, nep-bec, nep-cba and nep-for
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Citations: View citations in EconPapers (21)

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