Information in the Term Structure of WTI Crude Oil Futures
59 Pages Posted: 2 Mar 2020
Date Written: February 14, 2020
Nelson-Siegel factors extracted from the term structure of WTI oil futures predict subsequent WTI holding period returns both in-sample and out-of-sample. This predictability is not diminished by augmenting with macroeconomic indicators or oil market specific predictors. The term structure based predictability is distinct from the predictability in macroe- conomic fundamentals. However, controlling for information in the term structure renders oil market specific fundamentals insignificant in predict- ing holding period returns, with the exception of lagged spot returns. We also find that the most significant predictor of holding period returns is a time-varying decay factor in the term structure model.
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