The path to a sustainable palm oil futures market

Abstract

This study analyzes the information flow between the palm oil, soybean oil, and crude oil futures markets and proposes ways to develop the vegetable oil market, especially the palm oil futures market. In contrast to the results of a Granger causality test, we provide strong evidence that interactive cause–effect relationships exist between each pair of the three oil futures markets. Yet, the emergence of the net information flow depends on the trading volume and liquidity (i) from the crude oil futures to the two vegetable oil futures markets and (ii) from the soybean oil futures to the palm oil futures market. Our findings support the fact that the palm oil futures market is still subject to tight investment constraints and, therefore, fails to play a leading role in information discovery regarding the crude oil and soybean oil futures markets. This suggests that policymakers could pursue a series of initiatives, such as introducing US dollar-based trading and extending trading hours, to further develop the palm oil futures market and reduce market friction.