Forecasting Base Metal Prices with an International Stock Index

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

Research output: Contribution to journalArticlepeer-review

1 Scopus citations

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.

Original languageEnglish
Pages (from-to)277-302
Number of pages26
JournalFinance a Uver - Czech Journal of Economics and Finance
Volume73
Issue number3
DOIs
StatePublished - 2023
Externally publishedYes

Keywords

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

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