Forecasting the price of crude oil via convenience yield predictions

TLDR: In this paper, the authors developed an oil price forecasting technique which is based on the present value model of rational commodity pricing and suggested shifting the forecasting problem to the marginal convenience yield, which can be derived from the cost-of-carry relationship.

Abstract: The paper develops an oil price forecasting technique which is based on the present value model of rational commodity pricing. The approach suggests shifting the forecasting problem to the marginal convenience yield, which can be derived from the cost-of-carry relationship. In a recursive out-of-sample analysis, forecast accuracy at horizons within one year is checked by the root mean squared error as well as the mean error and the frequency of a correct direction-of-change prediction. For all criteria employed, the proposed forecasting tool outperforms the approach of using futures prices as direct predictors of future spot prices. Vis-a-vis the random-walk model, it does not significantly improve forecast accuracy but provides valuable statements on the direction of change. Copyright © 2007 John Wiley & Sons, Ltd.

Figures

Figure 1: Plots

Figure 6: Weights in the combined forecasting model

Table 1: Root mean squared error

Table 3: Direction of change

Figure 3: Estimation of the oil-specific risk premium

Figure 4: Lag order selection