Special Issue Article - Forecast Uncertainty in Macroeconomics and Finance. Editor: Tim Bollerslev Guest Editors: Matteo Ciccarelli and Kirstin Hubrich
What do we learn from the price of crude oil futures?
Version of Record online: 24 FEB 2010
Copyright © 2010 John Wiley & Sons, Ltd.
Journal of Applied Econometrics
Special Issue: Forecast Uncertainty in Macroeconomics and Finance. Editor: Tim Bollerslev Guest Editors: Matteo Ciccarelli and Kirstin Hubrich
Volume 25, Issue 4, pages 539–573, June/July 2010
How to Cite
Alquist, R. and Kilian, L. (2010), What do we learn from the price of crude oil futures?. J. Appl. Econ., 25: 539–573. doi: 10.1002/jae.1159
- Issue online: 4 MAY 2010
- Version of Record online: 24 FEB 2010
Despite their widespread use as predictors of the spot price of oil, oil futures prices tend to be less accurate in the mean-squared prediction error sense than no-change forecasts. This result is driven by the variability of the futures price about the spot price, as captured by the oil futures spread. This variability can be explained by the marginal convenience yield of oil inventories. Using a two-country, multi-period general equilibrium model of the spot and futures markets for crude oil we show that increased uncertainty about future oil supply shortfalls under plausible assumptions causes the spread to decline. Increased uncertainty also causes precautionary demand for oil to increase, resulting in an immediate increase in the real spot price. Thus the negative of the oil futures spread may be viewed as an indicator of fluctuations in the price of crude oil driven by precautionary demand. An empirical analysis of this indicator provides evidence of how shifts in the uncertainty about future oil supply shortfalls affect the real spot price of crude oil. Copyright © 2010 John Wiley & Sons, Ltd.