A general approach to recovering market expectations from futures prices with an application to crude oil

Futures markets are a potentially valuable source of information about market expectations. Exploiting this information has proved difficult in practice, because the presence of a time-varying risk premium often renders 
Futures markets are a potentially valuable source of information about market expectations. Exploiting this information has proved difficult in practice, because the presence of a time-varying risk premium often renders the futures price a poor measure of the market expectation of the price of the underlying asset. Even though the expectation in principle may be recovered by adjusting the futures price by the estimated risk premium, a common problem in applied work is that there are as many measures of market expectations as there are estimates of the risk premium. We propose a general solution to this problem that allows us to uniquely pin down the best possible estimate of the market expectation for any set of risk premium estimates. We illustrate this approach by solving the long-standing problem of how to recover the market expectation of the price of crude oil. We provide a new measure of oil price expectations that is considerably more accurate than the alternatives and more economically plausible. We discuss implications of our analysis for the estimation of economic models of energy-intensive durables, for the debate on speculation in oil markets, and for oil price forecasting.
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Metadaten
Author:Christiane Baumeister, Lutz Kilian
URN:urn:nbn:de:hebis:30:3-349023
URL:http://ssrn.com/abstract=2499484
DOI:http://dx.doi.org/10.2139/ssrn.2499484
Series (Serial Number):CFS working paper series (466)
Publisher:Center for Financial Studies
Place of publication:Frankfurt, M.
Document Type:Working Paper
Language:English
Year of Completion:2014
Year of first Publication:2014
Publishing Institution:Universitätsbibliothek Johann Christian Senckenberg
Release Date:2014/09/29
Tag:forecast; futures; market expectation; model uncertainty; oil price; risk premium
Issue:Version 13 September 2014
Pagenumber:58
HeBIS PPN:351154329
Institutes:Wirtschaftswissenschaften
Center for Financial Studies (CFS)
Dewey Decimal Classification:330 Wirtschaft
JEL-Classification:C53 Forecasting and Other Model Applications
D84 Expectations; Speculations
G14 Information and Market Efficiency; Event Studies
Q43 Energy and the Macroeconomy
Sammlungen:Universitätspublikationen
Licence (German):License Logo Veröffentlichungsvertrag für Publikationen

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