The Cointegration Analysis on the Spot Prices of the Malaysian Crude Palm Oil Futures Market

Abstract

Futures markets play an important role in the price discovery and forward pricing of agricultural commodities. The analysis of this study has mainly focused on the empirical test of the effect of production, stock and export variables on the prices of the Malaysian Crude Palm oil futures market. For the empirical work, correlation analysis, multiple regression and recent econometric analysis were conducted to determine the price relationships of the Malaysian Crude Palm oil futures markets with the production, stock and export variables. Order of integration for all the variables was checked using Augmented Dickey-Fuller and Phillips-Perron tests of unit root. The Johansen approach was used to test cointegration in multivariate system that involved long run and short run estimations. The Vector Error Correction Model was used to test for causal relationships. The empirical evidence obtained from the study shows there exist a significant long run and short run relationships between the cash and future prices of the Malaysian Crude Palm oil futures market with the production, stock and export variables. The results of the causality test also shows that there is a strong relationship between the Malaysian Crude Palm oil futures market with the production, stock and export variables This mean that any information flow regarding the price movement of the Malaysian Crude Palm oil futures market will affect the production, stock and export variables and vice-versa.