Long-term relationship of crude palm oil commodity pricing under structural break

The purpose of this paper is to examine the pricing efficiency of the Malaysian crude palm oil (CPO) market before and after the structural break. This study uses the daily closing price of CPO and CPO futures (CPO-F) for the period ranging from June 2009 to August 2016 while taking structural break...

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Main Authors:	Ayojimi, Salami Monsurat, Haron, Razali
Format:	Article
Language:	English
Published:	Emerald Publishing Limited 2018
Subjects:	HG4501 Stocks, investment, speculation
Online Access:	http://irep.iium.edu.my/67543/ http://irep.iium.edu.my/67543/ http://irep.iium.edu.my/67543/ http://irep.iium.edu.my/67543/7/67543%20Long-term%20relationship%20of%20crude.pdf

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recordtype	eprints
spelling	iium-675432018-11-21T07:24:09Z http://irep.iium.edu.my/67543/ Long-term relationship of crude palm oil commodity pricing under structural break Ayojimi, Salami Monsurat Haron, Razali HG4501 Stocks, investment, speculation The purpose of this paper is to examine the pricing efficiency of the Malaysian crude palm oil (CPO) market before and after the structural break. This study uses the daily closing price of CPO and CPO futures (CPO-F) for the period ranging from June 2009 to August 2016 while taking structural breaks into account. In this study, symmetric and asymmetric long-run relationship model are employed,such as the Johansen cointegration,VECM,TAR and M-TAR models,to examine the impact of structural breaks on the pricing efficiency of the Malaysian CPO market. This finding establish that Malaysian CPO price is efficient before and after the structural break. The consistent efficiency of the Malaysian CPO market supports the trading of the CPO-F in Globex and the use of Malaysian CPO pricing as the reference price. This study establishes that a structural break in the Malaysian CPO price series does not affect the pricing efficiency of the market. This study shows that using Malaysian CPO price as a reference price is sustainable even in the event of a structural break. Therefore, market participants in the Malaysian CPOmarkethavelesstoworryabouttheCPOpriceasitsupportstheweakformofefficiency.Pricedeviation in the short run may not lead to arbitrage profit as transaction cost may not be covered. Practical implications – This study implies that if there is distortion in the price due to shocks, both manufacturers and producers need to hedge their positions in the futures market(subject to their positions in the underlying market). By entering into the futures market, pricing is locked in advance; hence, price risk is eliminated. Such a distortion could also affect the efficiency of the CPO price, therefore this study also addresses the issue of efficiency of the local CPO market. Previous studies on Malaysian CPO pricing efficiency did not take the effect of structural break into consideration, making it difficult for these studies to show consistency in the efficiency of the Malaysian CPO market. Emerald Publishing Limited 2018 Article PeerReviewed application/pdf en http://irep.iium.edu.my/67543/7/67543%20Long-term%20relationship%20of%20crude.pdf Ayojimi, Salami Monsurat and Haron, Razali (2018) Long-term relationship of crude palm oil commodity pricing under structural break. Journal of Capital Market Studies, 2 (2). pp. 162-174. ISSN 2514-4774 https://www.emeraldinsight.com/doi/pdfplus/10.1108/JCMS-09-2018-0032 10.1108/JCMS-09-2018-0032
repository_type	Digital Repository
institution_category	Local University
institution	International Islamic University Malaysia
building	IIUM Repository
collection	Online Access
language	English
topic	HG4501 Stocks, investment, speculation
spellingShingle	HG4501 Stocks, investment, speculation Ayojimi, Salami Monsurat Haron, Razali Long-term relationship of crude palm oil commodity pricing under structural break
description	The purpose of this paper is to examine the pricing efficiency of the Malaysian crude palm oil (CPO) market before and after the structural break. This study uses the daily closing price of CPO and CPO futures (CPO-F) for the period ranging from June 2009 to August 2016 while taking structural breaks into account. In this study, symmetric and asymmetric long-run relationship model are employed,such as the Johansen cointegration,VECM,TAR and M-TAR models,to examine the impact of structural breaks on the pricing efficiency of the Malaysian CPO market. This finding establish that Malaysian CPO price is efficient before and after the structural break. The consistent efficiency of the Malaysian CPO market supports the trading of the CPO-F in Globex and the use of Malaysian CPO pricing as the reference price. This study establishes that a structural break in the Malaysian CPO price series does not affect the pricing efficiency of the market. This study shows that using Malaysian CPO price as a reference price is sustainable even in the event of a structural break. Therefore, market participants in the Malaysian CPOmarkethavelesstoworryabouttheCPOpriceasitsupportstheweakformofefficiency.Pricedeviation in the short run may not lead to arbitrage profit as transaction cost may not be covered. Practical implications – This study implies that if there is distortion in the price due to shocks, both manufacturers and producers need to hedge their positions in the futures market(subject to their positions in the underlying market). By entering into the futures market, pricing is locked in advance; hence, price risk is eliminated. Such a distortion could also affect the efficiency of the CPO price, therefore this study also addresses the issue of efficiency of the local CPO market. Previous studies on Malaysian CPO pricing efficiency did not take the effect of structural break into consideration, making it difficult for these studies to show consistency in the efficiency of the Malaysian CPO market.
format	Article
author	Ayojimi, Salami Monsurat Haron, Razali
author_facet	Ayojimi, Salami Monsurat Haron, Razali
author_sort	Ayojimi, Salami Monsurat
title	Long-term relationship of crude palm oil commodity pricing under structural break
title_short	Long-term relationship of crude palm oil commodity pricing under structural break
title_full	Long-term relationship of crude palm oil commodity pricing under structural break
title_fullStr	Long-term relationship of crude palm oil commodity pricing under structural break
title_full_unstemmed	Long-term relationship of crude palm oil commodity pricing under structural break
title_sort	long-term relationship of crude palm oil commodity pricing under structural break
publisher	Emerald Publishing Limited
publishDate	2018
url	http://irep.iium.edu.my/67543/ http://irep.iium.edu.my/67543/ http://irep.iium.edu.my/67543/ http://irep.iium.edu.my/67543/7/67543%20Long-term%20relationship%20of%20crude.pdf
first_indexed	2023-09-18T21:35:53Z
last_indexed	2023-09-18T21:35:53Z
_version_	1777412817070063616

Long-term relationship of crude palm oil commodity pricing under structural break

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