How Futures Markets Reflect People's Expectation About Future Prices

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Futures markets reflect people 's expectation about future prices. However, it has been shown that models based on single oil futures-spot spread tend to be less accurate in the mean-squared prediction error sense than forecasts from simpler models such as no-change model or futures forecast (forecast the h-month-ahead spot price as the current futures price that matures in h-month). This paper shows that the term structure of oil futures prices also fails to improve on the forecast performance of the simple no-change forecast. Moreover, scenario analysis shows that the conclusion is insensitive to the length of the initial estimation window or the length of the sample period. JEL Code: C53, Q47 Key Words: Oil price, futures, forecast, term structure, spread. section{Introduction} The forecast of the spot prices of commodities such as crude oil has played an important role in modern economics and finance. Accurate predictions of crude oil price will provide tremendous help since they are also often used as inputs by policymakers such as governors of the central banks for the decision of monetary policies. Since oil futures prices reflect the prices that both the buyer and seller agree will be the price of oil upon delivery, they provided information about investor 's expectations about the future price of oil. Recently people have found out that using the oil futures-spot spread can help predict future oil spot prices under certain samples (Wu and McCallum, 2005),
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