Forecasting Oil Price Movements: Exploiting the Information in the Future Market
CEIS Research Paper
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 .nd 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 codes: G1, Q3, Q4
Date: Monday 05 March 2007
Revision Date: Monday 05 March 2007