Short-horizon return predictability and oil prices

Abstract

We nd that, at horizons of one to three quarters, the oil price shocks exhibit predictive performance which is both statistically and economically signicant. Obtaining signicant results in a sample period aer the oil crisis in the 1970s is not an easy task since most variables lose their forecasting power within this period (Welch and Goyal 2008). In terms of global performance, our variable is better than all other variables considered (consumption-wealth ratio, price-dividend ratio, output gap and risk-free rate) with an 2R of 6%. is meaningful in-sample result was also detected in out-of-sample tests. Our variable exhibited the best out-of-sample 2R, which was close to 1.2% at one quarter. For longer time horizons, however, no variable showed a signicant predictive performance.