Global economic conditions index and oil price predictability

Abstract

The numerous academics rely on exogenous drivers to improve the accuracy of oil price forecasting. This study mainly explores whether a new indicator of global economic conditions proposed by Baumeister et al. (2020) can successfully predict the oil price. Our empirical results reveal that the global economic conditions index can extremely improve the accuracy in forecasting oil price in terms of univariate and bivariate analysis. In addition, compared with 14 traditional macroeconomic variables, global economic conditions index exhibits incremental predictive content in forecasting oil price. The longer forecasting horizons analysis confirms the superior forecasting performance of the global economic condition index for short-term (h = 2 and h = 3). Our findings can provide important implications to market participants in crude oil market.