In examining stochastic models for commodity prices, central questions oñen revolve around time-varying trend, stochastic convenience yield and volatility, and mean reversion. This paper seeks to assess and compare alternative approaches to modelling these effects, with focus on forecast performance. Three specifications are considered: (i) random-walk models with GARCH and normal or Student-t innovations; (ii) Poisson-based jump-diffusion models with GARCH and normal or Student-t innovations; and (iii) mean-reverting models that allow for uncertainty in equilibrium price. Our empirical application makes use of aluminium spot and futures price series at daily and weekly frequencies. Results show: (i) models with stochastic convenience yield outperform all other competing models, and for all forecast horizons; (ii) the use of futures prices does not always yield lower forecast error values compared to the use of spot prices; and (iii) within the class of (G)ARCH random-walk models, no model uniformly dominates the other. Copyright

Additional Metadata
Keywords Commodity price, Conditional heteroskedasticity, Convenience yield, Discrete jumps, Forecast performance
Persistent URL dx.doi.org/10.1002/for.1061
Journal Journal of Forecasting
Citation
Bernard, J.-T. (Jean-Thomas), Khalaf, L, Kichian, M. (Maral), & McMahon, S. (Sebastien). (2008). Forecasting commodity prices: GARCH, jumps, and mean reversion. Journal of Forecasting, 27(4), 279–291. doi:10.1002/for.1061