Commodity Prices, Commodity Currencies, and Global Economic Developments

35 Pages Posted: 1 Mar 2010

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: February 2010

Abstract

In this paper we seek to produce forecasts of commodity price movements that can systematically improve on naive statistical benchmarks, and revisit the forecasting performance of changes in commodity currencies as 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 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 the exchange rate-based model and especially the PLS factor-augmented model are more prone to outperform the naive statistical benchmarks. 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, Exchange rates, Factor models, Forecasting, 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 (February 2010). CEPR Discussion Paper No. DP7689. Available at SSRN: https://ssrn.com/abstract=1559645

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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