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Forecasting Base Metal Prices with an International Stock Index

Author

Listed:
  • Pablo Pincheira-Brown

    (School of Business Universidad Adolfo Ibánez)

  • Nicolás Hardy

    (Facultad de Administración y Economía, Universidad Diego Portales)

  • Cristobal Henrriquez

    (School of Economics and Business, Universidad Finis Terrae)

  • Ignacio Tapia

    (School of Economics and Business, Universidad Finis Terrae)

  • Andrea Bentancor

    (Facultad de Economía y Negocios, Universidad de Talca)

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.

Suggested Citation

  • Pablo Pincheira-Brown & Nicolás Hardy & Cristobal Henrriquez & Ignacio Tapia & Andrea Bentancor, 2023. "Forecasting Base Metal Prices with an International Stock Index," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 73(3), pages 277-302, October.
  • Handle: RePEc:fau:fauart:v:73:y:2023:i:3:p:277-302
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    References listed on IDEAS

    as
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    Cited by:

    1. Hardy, Nicolás & Ferreira, Tiago & Quinteros, Maria J. & Magner, Nicolás S., 2023. "“Watch your tone!”: Forecasting mining industry commodity prices with financial report tone," Resources Policy, Elsevier, vol. 86(PA).

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    More about this item

    Keywords

    forecasting; commodities; base metals; univariate time-series models; out-of-sample comparison; base metal equity securities.;
    All these keywords.

    JEL classification:

    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
    • L74 - Industrial Organization - - Industry Studies: Primary Products and Construction - - - Construction
    • O18 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Urban, Rural, Regional, and Transportation Analysis; Housing; Infrastructure
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets

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