Commodity futures help forecast spot prices during periods of turmoil: IMF paper

An International Monetary Fund paper published on Thursday finds no significant difference in the forecasting ability of futures markets during bull and bear markets.

David Reichsfeld and Shaun Roache, the paper's authors, assess the spot price forecasting performance of 10 commodity futures at various horizons up to two years and test whether their performance is affected by market conditions. The authors note that futures prices did a poor job as forecasters during the recent commodity price cycle and attempt to find better methods to project commodity price movements.

The authors find that the forecasting performance of futures does not depend on the slope of the futures curve, in contrast to the predictions of well-known models of commodity markets. They also find futures' forecasting performance to be invariant to whether prices are in an upswing or downswing, casting doubt on aspersions that uninformed investors participating during bull markets impede the price discovery process.

Click here to read the paper.