Forecasting monthly LME Copper returns

Abstract: We evaluate if monthly LOCADY returns on the London Metal Exchange can be accurately predicted one, two and three months ahead. In total ten models are constructed using time-varying parameters and bandwidth optimization. The models are evaluated against one another using the following pseudo-out-of sample test statistics: Diebold and Mariano (1995), Clark and West (2006), Giacomini and White (2006) and the Campbell and Thompson (2008) out-of-sample R2. The test statistics generated are inconsistent. A few models are able to generate positive out-of-sample R2 values for one and two month predictions. No model significantly outperforms a random walk for the three step ahead prediction.