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Forecasting crude oil prices: Does global financial uncertainty matter?

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  • Ma, Yong
  • Li, Shuaibing
  • Zhou, Mingtao

Abstract

In this paper, we introduce an informative uncertainty measure, global financial uncertainty (GFU), for the prediction of crude oil price returns. We find that GFU exhibits significant and remarkable forecasting power for crude oil price returns both in- and out-of-sample with monthly R2 of 13.63% and 11.32%, respectively. This predictive power outperforms and complements those of popular economic variables and uncertainty measures. Further analysis shows that a mean–variance investor can obtain considerable economic gains based on the return forecasts of GFU. By dissecting the GFU’s predictability, we observe that the strong forecasting efficacy of GFU for crude oil price returns may stem from its notable power during high-risk conditions and its significant effects on oil demand dynamics.

Suggested Citation

  • Ma, Yong & Li, Shuaibing & Zhou, Mingtao, 2024. "Forecasting crude oil prices: Does global financial uncertainty matter?," International Review of Economics & Finance, Elsevier, vol. 96(PC).
    • Handle: RePEc:eee:reveco:v:96:y:2024:i:pc:s1059056024007159
    DOI: 10.1016/j.iref.2024.103723
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    More about this item

    Keywords

    Global financial uncertainty; Crude oil prediction; Asset allocation; Demand shocks;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G19 - Financial Economics - - General Financial Markets - - - Other

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