Palm oil spot-futures relation: Evidence from unrefined and refined products

Abstract

This study examines the palm oil spot-futures relation in terms of mean and volatility spillovers from 2010 to 2018. Based on the cross-correlation function of standardised residuals and its squared residuals, our results show: first, crude palm oil (CPO) futures returns Granger cause refined palm oil, palm stearin and palm olein spot returns. Second, refined palm kernel oil spot returns Granger cause crude palm kernel oil futures returns in mean and variance. Third, CPO spot and refined palm olein futures returns are independent; and fourth, there is volatility spillover from CPO futures market to refined palm oil spot market within longer time. These findings suggest that refiners can use CPO futures returns instead of crude palm kernel oil futures returns for predicting the future spot return of refined palm oil products. To lock in purchasing price of unrefined palm oil products, the producers can rely on the spot volatility to decide the optimal number of crude palm kernel oil futures contracts.