Forecasting crude oil price movements with oil-sensitive stocks
Journal
Economic Inquiry
Journal Volume
52
Journal Issue
2
Pages
830-844
Date Issued
2014
Author(s)
Abstract
This paper uses monthly data from 1984:M10 to 2012:M8 to show that oil-sensitive stock price indices, particularly those in the energy sector, have strong power in predicting nominal and real crude oil prices at short horizons (1-month-ahead predictions), using both in- and out-of-sample tests. In particular, the forecasts based on oil-sensitive stock price indices are able to outperform significantly the no-change forecasts. For example, using the NYSE Arca (AMEX) oil index as a predictor, the 1-month-ahead forecasts for nominal crude oil prices reduce the mean squared prediction error by between 22% (for the West Texas Intermediate oil price) and 28% (for the Dubai oil price). Moreover, we find that the directional forecast based on the AMEX oil index is significantly better than a 50:50 coin toss. The novelty of this analysis is that it proposes a new and valuable predictor that both reflects timely market information and is readily available for forecasting the spot oil price. © 2014 Western Economic Association International.
SDGs
Type
journal article