Forecasting Oil Price Movements: Exploiting the Information In the Future Market

29 Pages Posted: 7 Mar 2007

See all articles by Andrea Coppola

Andrea Coppola

World Bank; University of Rome Tor Vergata - Department of Economics and Law; Ministry of Economy and Finance, Italy

Date Written: March 2007

Abstract

Relying on the cost of carry model, we investigate the long-run relationship between spot and futures prices and use the information implied in these cointegrating relationships to forecast out of sample oil spot and futures price movements. In order to forecast oil price movements, we employ a Vector Error Correction Model (VECM), where the deviations from the long-run relationships between spot and futures prices constitute the equilibrium error. In order to evaluate forecasting performance we use the Random Walk Model (RWM) as a benchmark. We find that: (i) in-sample, the information in the futures market can explain a sizeable portion of oil price movements; (ii) out-of-sample, the VECM is able to beat the random walk model, both in terms of point forecasting and in terms of market timing ability.

Keywords: crude oil, futures market, forecasting

JEL Classification: G1, Q3, Q4

Suggested Citation

Coppola, Andrea, Forecasting Oil Price Movements: Exploiting the Information In the Future Market (March 2007). CEIS Working Paper No. 101, Available at SSRN: https://ssrn.com/abstract=967408 or http://dx.doi.org/10.2139/ssrn.967408

Andrea Coppola (Contact Author)

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

University of Rome Tor Vergata - Department of Economics and Law ( email )

Rome, I-00133

Ministry of Economy and Finance, Italy ( email )

Via XX Settembre 97
Rome, Rome 00187
Italy

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