Evaluating the Forecasting Performance of Commodity Futures Prices

25 Pages Posted: 21 Aug 2011

See all articles by Trevor A. Reeve

Trevor A. Reeve

Board of Governors of the Federal Reserve System

Robert J. Vigfusson

Board of Governors of the Federal Reserve System

Date Written: August 12, 2011

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 sizable difference between spot and futures prices.

Keywords: financial markets, forecasting, commodities

JEL Classification: G13, E37, Q47

Suggested Citation

Reeve, Trevor A. and Vigfusson, Robert John, Evaluating the Forecasting Performance of Commodity Futures Prices (August 12, 2011). FRB International Finance Discussion Paper No. 1025, Available at SSRN: https://ssrn.com/abstract=1912969 or http://dx.doi.org/10.2139/ssrn.1912969

Trevor A. Reeve (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Robert John Vigfusson

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
208
Abstract Views
1,146
rank
174,474
PlumX Metrics