Copper Price Fluctuations and the Stock Market

Abstract

The aim of this study is to investigate whether the fluctuations in the copper price can add predictive power to a model forecasting stock market returns. Our findings from the in-sample test are that past fluctuations in the copper price are related to current stock returns. Appreciations in the copper price during contraction periods forecasts positive stock returns, and counter wise, decreased stock prices during expansionary periods. From the out-of-sample experiment, using a rolling window regression, we find that copper price returns forecast directional returns in the S&P 500. The discussion of our findings backs up the idea that stock market return predictability is the logical response to varying business cycle conditions rather than stock market inefficiencies.