Evaluating the Hedging Performance of Malaysian Crude Palm Oil Futures Contract : Insights Into the Segmentation of Bull/Bear Market and The Impact of The Global Financial Crisis

Ku, Lee Yin (2017) Evaluating the Hedging Performance of Malaysian Crude Palm Oil Futures Contract : Insights Into the Segmentation of Bull/Bear Market and The Impact of The Global Financial Crisis. [Dissertation (University of Nottingham only)]

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Abstract

As crude palm oil (CPO) is one of the most tradable commodities and is exposed to persistence of price instability, the introduction of Bursa Malaysia's Crude Palm Oil Futures contract (FCPO) is playing a key role in the CPO market as it helps facilitate hedgers in hedging and price discovery purposes. This paper not only deals with the analysis of CPO prices in terms of hedging performance, the impact of the 2008 global financial crisis upon hedging effectiveness is also examined. Several econometric models which are commonly adopted in the financial literature such as the OLS, B-VAR, VECM, DVEC M-GARCH and BEKK M-GARCH are employed for comparison purpose. Hedging performance of models is compared in the context of variance reduction. Using daily data over the period between January 1996, to August, 2015 the results show that, on average, the hedging performance for CPO is superior during bearish periods than bullish periods. Moreover, the models appear to confer more variance reduction during global financial crisis compared to pre-crisis and post-crisis periods. Empirical findings of the study have proven that the M-GARCH models do not lead to a better performance than a parsimonious approach. Hence, this study favours a simpler econometric model which is OLS that yields better empirical results compared to other models in terms of variance reduction. These results are reasonably robust to selection of hedging strategies in response to the trend pattern of CPO prices that caused by negative shocks. The denotation of the optimal hedge ratios benefits market participants who concern with risk management to adjust their hedging strategies. The evidence presented in the research indicates that investors need to adjust their hedging strategies periodically, especially during the period that the presence of high fluctuations in CPO prices. Furthermore, Malaysian government can also alleviate several interventions in CPO market in order to reduce the basis risk as well as implement training programme as to how the external information exerts influences on the CPO market.

Item Type: Dissertation (University of Nottingham only)
Depositing User: Library Services, UNMC
Date Deposited: 19 Apr 2017 04:38
Last Modified: 13 Oct 2017 01:08
URI: http://eprints.nottingham.ac.uk/id/eprint/42000

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