Abstract
PurposeThe 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.Design/methodology/approachIn 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.FindingsThis 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.Research limitations/implicationsThis 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 CPO market have less to worry about the CPO price as it supports the weak form of efficiency. Price deviation in the short run may not lead to arbitrage profit as transaction cost may not be covered.Practical implicationsThis 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.Originality/valuePrevious 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.
Highlights
Even though the issue of long-run relationship between markets has been extensively examined, understanding the relationship between markets continues relevant because knowledge about commodity price is important in order to take a position in the commodity market
As this study examines the Malaysian crude palm oil (CPO) market, the report of the Johansen Crude palm oil cointegration test is first presented and the decision on the existence of cointegration is based on the report of trace and max-Eigen statistics
The finding of this study consistently shows that price deviation adjustment in the short-run is continuous as indicated by symmetric and asymmetric models
Summary
Even though the issue of long-run relationship between markets has been extensively examined, understanding the relationship between markets continues relevant because knowledge about commodity price is important in order to take a position in the commodity market. It is one of the reasons that empirical studies on the long-run relationship between markets continue to emerge until now Peri and Baldi, 2010; Sehgal et al, 2015; Ghosh and Kanjilal, 2016; Nambiappan et al, 2018). Since understanding the long-run relationship is the main concern regarding pricing efficiency, information about the speed of adjustment of short-run deviation is crucial. Once the long-run relationship between the two markets is established, market deviation in the short run becomes temporary. Published in Journal of Capital Markets Studies
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