Do Commodity Futures Help Forecast Spot Prices?

Journal Issue

Volume/Issue:: 2011/254
Series:: IMF Working Papers
Author(s):: David Reichsfeld, and Shaun Roache
Publisher:: INTERNATIONAL MONETARY FUND
Published Date:: November 2011
DOI:: http://dx.doi.org/10.5089/9781463923891.001
ISBN:: 9781463923891
ISSN:: 1018-5941
Page:: 25

We assess the spot price forecasting performance of 10 commodity futures at various horizons up to two years and test whether this performance is affected by market conditions. We reject efficient markets based on in-sample tests but, out-of-sample, we find that the forecast from the futures market is hard to beat. We find that the forecasting performance of futures does not depend on the slope of the futures curve, in contrast to the predictions of well-known models of commodity markets. We also find futures' forecasting performance to be invariant to whether prices are in an upswing or downswing, casting doubt on aspersions that uninformed investors participating during bull markets impede the price discovery process.

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Do Commodity Futures Help Forecast Spot Prices?