Do High-Frequency Financial Data Help Forecast Oil Prices? The Midas Touch at Work

38 Pages Posted: 2 Dec 2013

See all articles by Christiane Baumeister

Christiane Baumeister

University of Notre Dame; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Pierre Guérin

Government of Canada - Bank of Canada

Lutz Kilian

University of Michigan at Ann Arbor - Department of Economics; Centre for Economic Policy Research (CEPR)

Date Written: December 2013

Abstract

The substantial variation in the real price of oil since 2003 has renewed interest in the question of how to forecast monthly and quarterly oil prices. There also has been increased interest in the link between financial markets and oil markets, including the question of whether financial market information helps forecast the real price of oil in physical markets. An obvious advantage of financial data in forecasting oil prices is their availability in real time on a daily or weekly basis. We investigate whether mixed-frequency models may be used to take advantage of these rich data sets. We show that, among a range of alternative high-frequency predictors, especially changes in U.S. crude oil inventories produce substantial and statistically significant real-time improvements in forecast accuracy. The preferred MIDAS model reduces the MSPE by as much as 16 percent compared with the no-change forecast and has statistically significant directional accuracy as high as 82 percent. This MIDAS forecast also is more accurate than a mixed-frequency real-time VAR forecast, but not systematically more accurate than the corresponding forecast based on monthly inventories. We conclude that typically not much is lost by ignoring high-frequency financial data in forecasting the monthly real price of oil.

Keywords: Forecasts, Mixed frequency, Oil price, Real-time data

JEL Classification: C53, G14, Q43

Suggested Citation

Baumeister, Christiane and Guérin, Pierre and Kilian, Lutz, Do High-Frequency Financial Data Help Forecast Oil Prices? The Midas Touch at Work (December 2013). CEPR Discussion Paper No. DP9768. Available at SSRN: https://ssrn.com/abstract=2362317

Christiane Baumeister (Contact Author)

University of Notre Dame ( email )

722 Flanner Hall
Notre Dame, IN 46556
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+1 574 631 8450 (Phone)

HOME PAGE: http://https://sites.google.com/site/cjsbaumeister/

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Pierre Guérin

Government of Canada - Bank of Canada ( email )

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada

Lutz Kilian

University of Michigan at Ann Arbor - Department of Economics ( email )

611 Tappan Street
Ann Arbor, MI 48109-1220
United States
734-764-2320 (Phone)
734-764-2769 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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