Crude palm oil futures market efficiency: Long memory investigation

• Main Authors: Ahmad, Norzalina, Kellard, Neil, Snaith, Stuart
• Format: Conference or Workshop Item
• Language: English
• Published: 2013
• Subjects: HD Industries. Land use. Labor
• Online Access: http://repo.uum.edu.my/12274/1/2409140410.pdf; http://repo.uum.edu.my/12274/; http://www.internationalconference.com.my/proceeding/

The two fundamental functions of a futures market is the price discovery function and the hedging (or risk transfer) function. These functions can be achieved optimally if the market is efficient. This study employs daily data for the Malaysian crude palm oil (CPO) futures from 1997 to 2010 to explore the impact of the time series properties of the futures-spot basis and the cost of carry on futures market unbiasedness. The main result is that the basis of the CPO futures exhibit long memory component. Using interest rate as a proxy for cost of carry, our results support the evidence of the long memory. This evidence of long memory implies the existence of persistence in the data and as consequence; future spot price observations might be predictable on the basis of past realisations of the data. This leads to the rejection of unbiasedness hypothesis and therefore exhibits market inefficiency.