Forecasting Stock Returns: Do Commodity Prices Help?

34 Pages Posted: 18 Jul 2014

See all articles by Angela J. Black

Angela J. Black

University of Aberdeen - Business School

Olga Klinkowska

Kozminski University

David G. McMillan

University of Stirling

Fiona Jayne McMillan

University of St. Andrews

Date Written: July 16, 2014


This paper examines the relationship between stock prices and commodity prices and whether this can be used to forecast stock returns. As both prices are linked to expected future economic performance they should exhibit a long-run relationship. Moreover, changes in sentiment towards commodity investing may affect the nature of the response to disequilibrium. Results support cointegration between stock and commodity prices, while Bai-Perron tests identify breaks in the predictive regression. Forecasts are computed using a standard fixed (static) in-sample/out-of-sample approach and by rolling regressions, which incorporates the effect of changing forecast parameter values. A range of model specifications and forecast metrics are used. The historical mean model outperforms the forecast models in the static approach. However, in the rolling forecasts, those models that incorporate information from the long-run stock price/commodity price relationship outperform both the historical mean and other forecast models. Of note, the historical mean still performs relatively well compared to standard forecast models that include the dividend yield and short term interest rates but not the stock/commodity price ratio.

Keywords: Stock Prices, Commodity Prices, Forecasting, Rolling

JEL Classification: C22, G12

Suggested Citation

Black, Angela J. and Klinkowska, Olga and McMillan, David G. and McMillan, Fiona Jayne, Forecasting Stock Returns: Do Commodity Prices Help? (July 16, 2014). Available at SSRN: or

Angela J. Black

University of Aberdeen - Business School ( email )

Edward Wright Building
Dunbar Street
Aberdeen, Scotland AB24 3QY
United Kingdom
+44 0 1224 273316 (Phone)

Olga Klinkowska

Kozminski University ( email )

ul. Jagiellonska 57/59
Warsaw, 03-303

David G. McMillan (Contact Author)

University of Stirling ( email )

Stirling, Scotland FK9 4LA
United Kingdom

Fiona Jayne McMillan

University of St. Andrews ( email )

North St
St Andrews, Fife KY16 9AJ
United Kingdom

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