Risk-Adjusted Forecasts of Oil Prices

38 Pages Posted: 12 May 2006

Date Written: January 2009

Abstract

This paper documents the existence of a significant forecast error on crude oil futures. We interpret it as a risk premium, which, in part, could have been explained by means of a real-time US business cycle indicator, such as the degree of capacity utilization in manufacturing. This result is robust to the specification of the estimating equation and to the considered business cycle indicator. An out-of-the-sample prediction exercise reveals that futures adjusted to take into account this time-varying component produce significantly better forecasts than those of unadjusted futures, of futures adjusted for the average forecast error and of the random walk, particularly at horizons of more than 6 months.

Keywords: Oil, Forecasting, Futures

JEL Classification: E37, E44, G13, Q4

Suggested Citation

Pagano, Patrizio and Pisani, Massimiliano, Risk-Adjusted Forecasts of Oil Prices (January 2009). Bank of Italy Economic Research Paper No. 585; ECB Working Paper No. 999. Available at SSRN: https://ssrn.com/abstract=901951 or http://dx.doi.org/10.2139/ssrn.901951

Patrizio Pagano (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Massimiliano Pisani

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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