The Relationship of Crude Palm Oil Spot-Futures under Inflationary Expectation in Gold Market

Abstract

This study attempts to test whether the direction of information spillover between crude palm oil (CPO) spot and futures price corresponds to a long-term shift in gold price. While there is yet to be a study on the CPO spot-futures relationship under the inflationary expectation of gold price, this paper hypothesizes that market participants are bullish on gold price will use the commodity as an inflation hedge, and this put speculative pressure on future CPO price. Using daily data on CPO spot and futures returns from January 1996 to November 2011, notably, it is found that: First, there is volatility spillover from current futures return to spot return during bullish period in gold due to increase in investor demand; Second, only contemporaneous volatility spillover between spot and futures returns exist during bearish period as investors become more risk averse. This study adds to another stylized fact that the upward trend of the gold price has economic content that leads to speculation of CPO price in the futures market.