The Wax and Wane of CPO Prices in India: A DCC Approach to Understanding Market Sentiment

Abstract

This study provides a detailed analysis of Crude Palm Oil (CPO) price dynamics, focusing on the relationship between spot and future prices during significant global events, notably the COVID-19 pandemic and the Ukraine-Russia conflict. Utilizing Dynamic Conditional Correlation (DCC) models, the research examines conditional returns and covariance, as well as the correlation trends in the Crude Palm Oil (CPO) market. The study reveals critical insights into market behavior during these tumultuous times. For instance, sharp increases in covariance during key periods suggest strong movement synchronicity between spot and future prices, potentially driven by market-altering events. The onset of COVID-19 and the escalation of the Ukraine-Russia conflict are identified as significant influencers, disrupting global supply chains and impacting global food supplies, which in turn affect both spot and future Crude Palm Oil (CPO) prices. Additionally, the research finds a dynamic correlation trend between the future and spot prices of Crude Palm Oil (CPO). Starting with a strong positive correlation in 2018, the study observes a gradual decrease in this correlation, especially after 2020. This trend indicates diverging market forces or perceptions, particularly in response to the COVID-19 pandemic and the ongoing Ukraine-Russia conflict. Such fluctuations in correlation suggest varying market sentiments and expectations, which have implications for market risk assessment, hedging strategies, and speculative activities