Staff Reports
Commodity Prices, Commodity Currencies, and Global Economic Developments
August 2009 Number 387
JEL classification: C23, C53, F47

Authors: Jan J. J. Groen and Paolo A. Pesenti

In this paper, we seek to produce forecasts of commodity price movements that can systematically improve on naïve statistical benchmarks. We revisit how well changes in commodity currencies perform as potential efficient predictors of commodity prices, a view emphasized in the recent literature. In addition, we consider different types of factor-augmented models that use information from a large data set containing a variety of indicators of supply and demand conditions across major developed and developing countries. These factor-augmented models use either standard principal components or the more novel partial least squares (PLS) regression to extract dynamic factors from the data set. Our forecasting analysis considers ten alternative indices and sub-indices of spot prices for three different commodity classes across different periods. We find that, of all the approaches, the exchange-rate-based model and the PLS factor-augmented model are more likely to outperform the naïve statistical benchmarks, although PLS factor-augmented models usually have a slight edge over the exchange-rate-based approach. However, across our range of commodity price indices we are not able to generate out-of-sample forecasts that, on average, are systematically more accurate than predictions based on a random walk or autoregressive specifications.

Available only in PDFPDF33 pages / 234 kb

For a published version of this report, see Jan J. J. Groen and Paolo A. Pesenti, "Commodity Prices, Commodity Currencies, and Global Economic Developments," in Takatoshi Ito and Andrew K. Rose, eds., Commodity Prices and Markets. East Asia Seminar on Economics 20: 15-42. NBER conference volume. (Chicago: University of Chicago Press, 2011).

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