ABSTRACT:
The implementation of the palm biodiesel blend mandate in Malaysia has created new demand for palm oil, thus making the prices of both crude oil and palm oil move in tandem. Generally, the increase in demand for biodiesel products has resulted in a reduced supply of palm oil, which in turn has increased the price of crude palm oil (CPO) in the world market. However, the unpredictability of price movement which is highly influenced by the market situation and sentiment sometimes makes the relationship between both prices loosen. The motivation of this study is to analyse the relationship between Brent crude oil (BCO) and CPO using a non-linear autoregressive model (NARDL) for the period 2010-2019. By applying the Brock Dechert and Scheinkman (BDS), this study indicated the presence of the non-linearity relationship between BCO and CPO price. The bound tests with NARDL specification confirmed the asymmetric association between CPO price movements and their relation to positive and negative changes in BCO price. The estimated NARDL model confirmed the existence of an asymmetric relationship in the changes in CPO prices. This study found that in the long run, there is a significant relationship between the increase in BCO prices and CPO prices while no significant relationship between the decrease in BCO prices to CPO prices in the long run. In the short run, only the changes in BCO prices positively affect palm oil price inflation. The findings of this study are imperative to the industry players especially to the biofuel producers and exporters since changes in CPO price will directly affect their profitability and cost of production.
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