Oil Palm Industry Economic Journal Vol. 4 (2) September 2004 p. 23-28

Improving the Price Forecast of Crude Palm Oil Futures Using Historical Return Variances

Azmi Omar and Shamsul Majid
Received:    Accepted:    Available Online:


This paper attempts to investigate the price relationship between the spot and futures prices of crude palm oil contracts traded in the Malaysian Derivatives Exchange. Using historical variances of spot and futures price returns, we applied a model for approximating the convenience yield developed by Longstaff (1995). This model was then tested on the actual crude palm oil prices for the spot-month and three month contracts from January 1988 to December 2002, to determine the forecasting accuracy of this model relative to the simple cost-of carry model. There was some improvement in the predictive ability of this approach which could be attributed to the inclusion of historical return variances. The improvement was also evident when tested against out-of-sample data, suggesting that the inclusion of historical return variances in the form of the convenience yield could provide a better forecast of crude palm oil futures prices.

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