Expectations are key, especially when decisions are made under uncertainty. Often, forward-looking models are used in macroeconomics and finance. Asset prices are a valuable source of information about expectations as policymakers and the private sector often take them at face value. Futures prices, on the other hand, are not unbiased predictors of future spot prices in forecast efficiency regressions. Financial market participants demand compensation for risk, therefore asset prices are a function of both market expectations and risk premium.

This research explores asst pricing and how risk premia are modelled, and illustrates how this comes into play in the oil market. It shows that there is a long list of assets traded on financial, forward, and futures markets whose prices incorporate expectations about key macroeconomic variables. It also shows that the same general methodology can be applied to select the most plausible market-based expectation measure, which has very useful policy implications.