Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/130406
Authors: 
Baumeister, Christiane
Kilian, Lutz
Year of Publication: 
2016
Series/Report no.: 
CESifo Working Paper 5782
Abstract: 
Futures markets are a potentially valuable source of information about price expectations. Exploiting this information has proved difficult in practice, because time-varying risk premia often render the futures price a poor measure of the market expectation of the price of the underlying asset. Although this expectation in principle may be recovered by adjusting the futures price by the estimated risk premium, a common problem is that there are as many measures of the market expectation as there are estimates of the risk premium. We propose a general solution to this problem that allows us to select the most accurate estimate of the expectation for any set of risk premium estimates. We illustrate this approach by solving the long-standing problem of how to estimate the market expectation of the price of crude oil. We provide a new measure of oil price expectations that is substantially more accurate than the alternatives and more economically plausible. Our analysis has implications for the estimation of economic models of energy-intensive durables, for oil price forecasting, and for the measurement of oil price shocks.
Subjects: 
futures
risk premium
market expectation
model uncertainty
forecast
oil price
JEL: 
C53
D84
G14
Q43
Document Type: 
Working Paper

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