Commodity Prices, Commodity Currencies, and Global Economic Developments

33 Pages Posted: 3 Sep 2009

See all articles by Jan J. J. Groen

Jan J. J. Groen

Federal Reserve Bank of New York

Paolo A. Pesenti

Federal Reserve Bank of New York; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: August 2009

Abstract

In this paper, we seek to produce forecasts of commodity price movements that can systematically improve on naïve statistical benchmarks. We revisit how well changes in commodity currencies perform as potential efficient predictors of commodity prices, a view emphasized in the recent literature. In addition, we consider different types of factor-augmented models that use information from a large data set containing a variety of indicators of supply and demand conditions across major developed and developing countries. These factor-augmented models use either standard principal components or the more novel partial least squares (PLS) regression to extract dynamic factors from the data set. Our forecasting analysis considers ten alternative indices and sub-indices of spot prices for three different commodity classes across different periods. We find that, of all the approaches, the exchange-rate-based model and the PLS factor-augmented model are more likely to outperform the naïve statistical benchmarks, although PLS factor-augmented models usually have a slight edge over the exchange-rate-based approach. However, across our range of commodity price indices we are not able to generate out-of-sample forecasts that, on average, are systematically more accurate than predictions based on a random walk or autoregressive specifications.

Keywords: Commodity prices, forecasting, exchange rates, factor models, PLS regression

JEL Classification: C23, C53, F47

Suggested Citation

Groen, Jan J. J. and Pesenti, Paolo A., Commodity Prices, Commodity Currencies, and Global Economic Developments (August 2009). FRB of New York Staff Report No. 387. Available at SSRN: https://ssrn.com/abstract=1465964 or http://dx.doi.org/10.2139/ssrn.1465964

Jan J. J. Groen (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

HOME PAGE: http://nyfedeconomists.org/groen/

Paolo A. Pesenti

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States
212-720-5493 (Phone)
212-720-6831 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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