Forecasting the Oil‐Gasoline Price Relationship: Should We Care About the Rockets and the Feathers?

26 Pages Posted: 4 Mar 2014

See all articles by Andrea Bastianin

Andrea Bastianin

Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS); Università degli Studi di Milano-Bicocca - Center for European Studies (CefES)

Marzio Galeotti

University of Milan - Department of Environmental Science and Policy (DESP); Bocconi University - IEFE Centre for Research on Energy and Environmental Economics and Policy

Matteo Manera

University of Milan-Bicocca, Italy - Department of Economics, Management and Statistics (DEMS); Fondazione Eni Enrico Mattei (FEEM), Milan, Italy

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Date Written: February 28, 2014

Abstract

According to the Rockets and Feathers hypothesis (RFH), the transmission mechanism of positive and negative changes in the price of crude oil to the price of gasoline is asymmetric. Although there have been many contributions documenting that downstream prices are more reactive to increases than to decreases in upstream prices, little is known about the forecasting performance of econometric models incorporating asymmetric price transmission from crude oil to gasoline. In this paper we fill this gap by comparing point, sign and probability forecasts from a variety of Asymmetric-ECM (A-ECM) and Threshold Autoregressive ECM (TAR-ECM) specifications against a standard ECM. Forecasts from A-ECM and TAR-ECM subsume the RFH, while the ECM implies symmetric price transmission from crude oil to gasoline. We quantify the forecast accuracy gains due to incorporating the RFH in predictive models for the prices of gasoline and diesel. We show that the RFH is useless for point forecasting, while it can be exploited to produce more accurate sign and probability forecasts. Finally, we highlight that the forecasting performance of the estimated models is time-varying.

Keywords: Asymmetries, Forecast Evaluation, Gasoline, Crude Oil, Rockets and Feathers

JEL Classification: C22, C32, C53, Q40, Q47

Suggested Citation

Bastianin, Andrea and Galeotti, Marzio and Manera, Matteo, Forecasting the Oil‐Gasoline Price Relationship: Should We Care About the Rockets and the Feathers? (February 28, 2014). Available at SSRN: https://ssrn.com/abstract=2404245 or http://dx.doi.org/10.2139/ssrn.2404245

Andrea Bastianin (Contact Author)

Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS) ( email )

Piazza dell'Ateneo Nuovo, 1
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Italy

Università degli Studi di Milano-Bicocca - Center for European Studies (CefES)

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Marzio Galeotti

University of Milan - Department of Environmental Science and Policy (DESP) ( email )

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Italy
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+39-2-50316486 (Fax)

HOME PAGE: http://www.unimi.it/chiedove/cv/ENG/marzio_galeotti.pdf?1531977155891

Bocconi University - IEFE Centre for Research on Energy and Environmental Economics and Policy ( email )

via Rontgen
Milan, 20123
Italy
+39-2-58362340 (Phone)

HOME PAGE: http://www.iefe.unibocconi.it

Matteo Manera

University of Milan-Bicocca, Italy - Department of Economics, Management and Statistics (DEMS) ( email )

Via Bicocca degli Arcimboldi, 8
Milan, 20126
Italy
+39 02 6448 5819 (Phone)
+39 02 6448 5878 (Fax)

HOME PAGE: http://www.matteomanera.it

Fondazione Eni Enrico Mattei (FEEM), Milan, Italy ( email )

Corso Magenta, 63
Milan, 20123
Italy
+39 02 520 36944 (Phone)

HOME PAGE: http://www.feem.it

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