Investor demand, market efficiency and spot-futures relation: Further evidence from crude palm oil

Go, Y.H. and Lau, W.Y. (2017) Investor demand, market efficiency and spot-futures relation: Further evidence from crude palm oil. Resources Policy, 53. pp. 135-146. ISSN 0301-4207

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Official URL: http://dx.doi.org/10.1016/j.resourpol.2017.06.009

Abstract

This study examines the hypothesis of Tilton et al. (2011) that assert investor demand affects commodity prices when spot and futures prices are closely correlated during strong contango in a hard commodity like copper. However, using daily data of crude palm oil (CPO) spot and futures prices from January 2000 to July 2016, after taking into account the variance of the increments in a random walk as measured by variance ratio, our study finds that spot and futures prices are highly correlated during backwardation period. It is further observed that: First, investor demand on the futures market is highly correlated with spot and futures prices during backwardation, but lesser during weak contango, and the least correlated during strong contango. Second, the efficiency of the futures market is related to the degree of correlation between spot and futures price changes. High efficient information transmission in the futures market is linked to a high correlation between spot and futures markets and vice versa. Therefore, we extend the hypothesis that the preference of holding a long position in the futures market is due to the anticipation of insufficient supply of CPO which happens during the backwardation period.

Item Type: Article
Uncontrolled Keywords: Contango and backwardation; Weak-form market efficiency; Investor demand; Spot-futures relation; Crude palm oil
Subjects: H Social Sciences > HG Finance
Divisions: Faculty of Economics & Administration
Depositing User: Ms. Juhaida Abd Rahim
Date Deposited: 04 Aug 2017 06:43
Last Modified: 04 Aug 2017 06:43
URI: http://eprints.um.edu.my/id/eprint/17633

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