Structural Breaks in Spot and Futures Crude Palm Oil Returns

Abstract

This paper tests for the presence of structural breaks in spot and future crude palm oils returns. Using daily data that span from the period of January 1996 to August 2008, we find regime changes both in the mean and volatility levels of both returns series. We provide explanations for the cause of these regime shifts. We found no evidence of structural breaks presence in the dynamic of returns that produces a regime shift in the long run equilibrium relationship between spot and future prices. Having identified the breaks in the mean and variance of both returns series, we model their relationship by incorporating those breaks in volatility clustering procedure. The results support the importance of structural break in this volatility clustering estimation, however, failing which may lead to a spuriously persistency estimation.

Keywords: Structural Break, Bai and Perron Test, ICSS Algorithm, Gregory Hansen Cointegration Test, RCPO and RFCPO

JEL Classification: C50