Evaluating the Empirical Performance of Alternative Econometric Models for Oil Price Forecasting

49 Pages Posted: 31 Jan 2007

See all articles by Matteo Manera

Matteo Manera

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

Chiara Longo

Fondazione Eni Enrico Mattei (FEEM)

Anil Markandya

Basque Centre for Climate Change (BC3); University of Bath

Elisa Scarpa

Edison Trading

Date Written: January 2007

Abstract

The relevance of oil in the world economy explains why considerable effort has been devoted to the development of different types of econometric models for oil price forecasting. Several specifications have been proposed in the economic literature. Some are based on financial theory and concentrate on the relationship between spot and futures prices ("financial" models). Others assign a key role to variables explaining the characteristics of the physical oil market ("structural" models). The empirical literature is very far from any consensus about the appropriate model for oil price forecasting that should be implemented. Relative to the previous literature, this paper is novel in several respects. First of all, we test and systematically evaluate the ability of several alternative econometric specifications proposed in the literature to capture the dynamics of oil prices. Second, we analyse the effects of different data frequencies on the coefficient estimates and forecasts obtained using each selected econometric specification. Third, we compare different models at different data frequencies on a common sample and common data. Fourth, we evaluate the forecasting performance of each selected model using static and dynamic forecasts, as well as different measures of forecast errors. Finally, we propose a new class of models which combine the relevant aspects of the financial and structural specifications proposed in the literature ("mixed" models). Our empirical findings can be summarized as follows. Financial models in levels do not produce satisfactory forecasts for the WTI spot price. The financial error correction model yields accurate in-sample forecasts. Real and strategic variables alone are insufficient to capture the oil spot price dynamics in the forecasting sample. Our proposed mixed models are statistically adequate and exhibit accurate forecasts. Different data frequencies seem to affect the forecasting ability of the models under analysis.

Keywords: Oil Price, WTI Spot and Futures Prices, Forecasting, Econometric Models

JEL Classification: C52, C53, Q32, Q43

Suggested Citation

Manera, Matteo and Longo, Chiara and Markandya, Anil and Scarpa, Elisa, Evaluating the Empirical Performance of Alternative Econometric Models for Oil Price Forecasting (January 2007). FEEM Working Paper No. 4.2007, Available at SSRN: https://ssrn.com/abstract=958942 or http://dx.doi.org/10.2139/ssrn.958942

Matteo Manera (Contact Author)

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

Chiara Longo

Fondazione Eni Enrico Mattei (FEEM) ( email )

Corso Magenta 63
20123 Milan
Italy

Anil Markandya

Basque Centre for Climate Change (BC3)

Gran Vía 35-2
Bilbao, Vizcaya 48009
Spain

University of Bath ( email )

Claverton Down
Bath, BA2 7AY
United Kingdom

Elisa Scarpa

Edison Trading ( email )

Foro Buonaparte, 31
Milan, 20121
Italy

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