Oil price assumptions in macroeconomic forecasts: should we follow futures market expectations?

Abstract

In macroeconomic forecasting, in spite of its important role in price and activity developments, oil prices are usually taken as an exogenous variable, for which assumptions have to be made. This paper evaluates the forecasting performance of futures market prices against the other popular technical procedure, the carry-over assumption. The results suggest that there is almost no difference between opting for futures market prices or using the carry-over assumption for short-term forecasting horizons (up to 12 months), while, for longer-term horizons, they favour the use of futures market prices. However, as futures market prices reflect market expectations for world economic activity, futures oil prices should be adjusted whenever market expectations for world economic growth are different to the values underlying the macroeconomic scenarios, in order to fully ensure the internal consistency of those scenarios.

Forecasting the price of crude oil via convenience yield predictions

“…By running Mincer-Zarnowitz regressions, Chernenko et al (2004) and Chinn et al (2005) were not able to reject the unbiasedness hypothesis for crude oil. Coimbra and Esteves (2004) detected a downward bias increasing in the forecast horizon but, at least for shortterm predictions, not statistically significant. While empirical evidence is mixed, there are strong theoretical arguments against the view that futures prices are unbiased predictors of future spot prices.…”

Risk-Adjusted Forecasts of Oil Prices

“…Bailey and Chan (1993) …nd that commodity risk premia co-vary with stock and bond market variables, re ‡ecting economy-wide risk factors. Coimbra and Esteves (2004) provide evidence of a correlation between oil futures forecast errors and market expectation errors on world economic activity. Roache (2008) …nds that commodity futures o¤er a hedge against lower interest rates and that investors are willing to accept lower expected returns for this position.…”

Opec Oil Price Prediction Using Anfis

“…An accurate predictor can help to foresee the circumstances of trends in the future (Yazdani-Chamzini et al 2012) and provide the useful information for customers, suppliers, politicians and generally for stakeholder to fulfill the appropriate strategies in order to prevent or mitigate risks (Yazdani-Chamzini et al 2012). These prices are very difficult to forecast (Coimbra and Esteves 2004). So in the literature, the predictors have been investigated in order to find the best predictor.…”