Risk-Adjusted Forecasts of Oil Prices

Abstract

4Non-technical summary 5

A General Approach to Recovering Market Expectations from Futures Prices with an Application to Crude Oil

“…Even when using fully revised data, however, these models are systematically less accurate than the oil futures price. This conclusion also applies to the models of Pagano and Pisani (2009), which were originally designed for out-of-sample forecasting.…”

“…Examples include De Roon, Nijman, and Veld (2000), Sadorsky (2002), Pagano and Pisani (2009), Acharya, Lochstoer, and Ramadorai (2013), and Etula (2013. These studies provide direct evidence that returns in oil futures markets can be predicted using a range of aggregate and commodity-market specific financial and macroeconomic variables, which implies the presence of a time-varying risk premium.…”

“…The composite leading indicator for the OECD economies and six non-OECD economies (Brazil, China, India, Indonesia, Russia and South Africa) was obtained from the OECD Main Economic Indicator database. We follow Pagano and Pisani (2009) in selecting the ratio-to-trend series which expresses the cyclical behavior of the indicator as deviations from its long-run trend.…”

Using Market Expectations to Test for Speculative Bubbles in the Crude Oil Market

“…The authors show that risk premia are economically significant and exhibit substantial fluctuations over time. The presence of time-varying risk premia in oil markets is also supported by the large number of studies that find predictability in oil futures returns by using various financial and macroeconomic variables (De Roon, Nijman, and Veld 2000, Pagano and Pisani 2009, Etula 2013.…”

Macro-Hedging for Commodity Exporters

“…The risk premium is computed as the average ex-post forecast error over the sample period. Lower risk premia are generally found using a longer time sample (Patrizio Pagano and Massimiliano Pisani (2009)). Over the last five years oil prices have been mostly rising and therefore part of the gap between spot and futures prices can be due to a peso effect.…”