Do Commodity Futures Help Forecast Spot Prices?

November 1, 2011

Preview Citation

Format: Chicago

David A Reichsfeld, and Shaun K. Roache Do Commodity Futures Help Forecast Spot Prices?, (USA: International Monetary Fund, 2011) accessed December 22, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

We assess the spot price forecasting performance of 10 commodity futures at various horizons up to two years and test whether this performance is affected by market conditions. We reject efficient markets based on in-sample tests but, out-of-sample, we find that the forecast from the futures market is hard to beat. We find that the forecasting performance of futures does not depend on the slope of the futures curve, in contrast to the predictions of well-known models of commodity markets. We also find futures' forecasting performance to be invariant to whether prices are in an upswing or downswing, casting doubt on aspersions that uninformed investors participating during bull markets impede the price discovery process.

Subject: Commodities, Commodity prices, Futures, Futures markets, Return on investment

Keywords: Random walk, Risk premium, Spot market, WP

Publication Details

Pages:

25
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2011/254
Stock No:

WPIEA2011254
ISBN:

9781463923891
ISSN:

1018-5941

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