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Volume 73, Issue 3


Forecasting Base Metal Prices with an International Stock Index

Bentancor, Andrea; Hardy, Nicolás; Henrriquez, Cristobal; Pincheira-Brown, Pablo; Tapia, Ignacio

Year: 2023   Volume: 73   Issue: 3   Pages: 277-302

Abstract: In this paper, we show that the MSCI ACWI Metals and Mining Index has the ability to predict base metal returns. We use both in-sample and out-of-sample exercises to conduct such examinations. The theoretical underpinning of these results relies on the present-value model for stock-price determination. This model has the implication of Granger causality from stock prices to their key determinants (fundamentals). In the case of metal and mining producers, one of the key elements determining the value of these firms is the price of the commodity they produce and export. Our results are consistent with this theoretical framework, as forecasts based on a model including the MSCI index outperform forecasts that do not use the information contained in that index. Furthermore, in most of our exercises, models equipped with the MSCI Index fare better than models that use the information of equity indices from major commodity exporting countries. We assess predictive ability considering different criteria, such as Mean Squared Prediction Error, Correlations with the target variable and returns from trading strategies.

JEL classification: C52, C53, G17, E270, E370, F370, L740, O180, R310

Keywords: forecasting, commodities, base metals, univariate time-series models, out-of-sample comparison, base metal equity securities

DOI: https://doi.org/10.32065/CJEF.2023.03.03

RePEc: https://ideas.repec.org/a/fau/fauart/v73y2023i3p277-302.html

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