IMPLICATION OF NATIONAL KEY

ECONOMIC AREAS (NKEAs): CONVERGENCE ANALYSIS

BETWEEN SPOT AND FUTURES MARKET

NUR ATHIRAH BINTI ABDUL MANAN

2012243106

BACHELOR OF BUSINESS ADMINISTRATION

(HONS) FINANCE
FACULTY OF BUSINESS MANAGEMENT
UNIVERSITI TEKNOLOGI MARA
SEGAMAT, JOHOR.

JUNE 2015
TITLE PAGE

IMPLICATION OF NATIONAL KEY

ECONOMIC AREAS (NKEAs): CONVERGENCE ANALYSIS
BETWEEN SPOT AND FUTURES MARKET

NUR ATHIRAH BINTI ABDUL MANAN

2012243106

Submitted in Partial Fulfillment

of the Requirement for the
Bachelor of Business Administration (Hons) Finance

FACULTY OF BUSINESS MANAGEMENT

UNIVERSITI TEKNOLOGI MARA
SEGAMAT, JOHOR.

JUNE 2015

BACHELOR OF BUSINESS ADMINISTRATION (HONS) FINANCE

FACULTY OF BUSINESS MANAGEMENT
UNIVERSITI TEKNOLOGI MARA
SEGAMAT, JOHOR.

DECLARATION OF ORIGINAL WORK

NUR ATHIRAH BINTI ABDUL MANAN

2012243106

Hereby, declare that,

This work has not previously been accepted in substance for any degree, locally or
overseas and is not being concurrently submitted for this degree or any other degrees.
This project paper is the result of my independent work and investigation, except
where otherwise stated.
All verbatim extracts have been distinguished by quotation marks and sources of my
information have been specifically acknowledged.

Signature: _______________

Date: _________________

LETTER OF SUBMISSION
21st June 2015

Sir Mohamad Azwan Md Isa

Faculty of Business Management
Universiti Teknologi MARA
85009 SEGAMAT
JOHOR DARUL TAKZIM

Dear Sir,
SUBMISSION OF PROJECT PAPER

Attached is the project paper titled IMPLICATION OF NATIONAL KEY ECONOMIC

AREAS (NKEAs): CONVERGENCE ANALYSIS BETWEEN SPOT AND FUTURES
MARKET to fulfill the requirement as needed by the Faculty of Business Management,
Universiti Teknologi MARA.
Thank you.

Yours sincerely,

NUR ATHIRAH BINTI ABDUL MANAN

Bachelor of Business Administration (Hons) Finance

2012243106

ACKNOWLEDGEMENT
Foremost, I wish to count my blessings and thanked Allah S.W.T for providing me with the
mental and physical faculties as well as other positive attributes notably perseverance to
complete this challenging research paper. Special mention goes to my research advisor Sir
Mohamad Azwan Bin Md Isa for his guidance, supervision and support. His constructive
comments and suggestions greatly assist in the successful completion of this project paper. In
addition, special thanks to En. Syamsul Samsudin for his guidance and advice towards the
completion of this project paper.
Last but not least, I would like to extend my appreciation to each and every one of you who
have assisted in one way or another in order for me to complete this research paper. Sincere
thanks to all my friends and office colleagues for their understanding, kindness and moral
support during the testing time undertook to complete this assignment. Lastly, my deepest
gratitude to my beloved parents for their unwavering support, invaluable assistance and
sincere blessing.

Thank you.

ABSTRACT
Briefly, the Malaysian economy is expected to be resilient and still show significant growth
while the global economy gives cause for concern on several fronts. In the meantime, the
steps government has taken towards economic transformation and moving towards high
income experienced vertical take-off with most targets being achieved or exceeded. Hence, in
the Tenth Malaysia Plan, the Economic Transformation Programme (ETP) focusses on 12
National Key Economic Areas (NKEAs) had been announced. One of the key areas is the
palm oil industry. Hence, this study is aimed at examining the implication of this ETP
towards the palm oil industry and determining the cointegration and causality relationship
between spot and futures market. For the empirical work, correlation analysis, multiple
regression and recent econometric analysis were conducted to determine the relationships of
the Crude Palm Oil spot markets with the futures market variables. Order of integration for
all the variables was checked using Augmented Dickey-Fuller tests of unit root. The Johansen
approach was used to test cointegration in multivariate system that involved long run
estimations. The Granger Causality test was used to test causal relationships. The empirical
evidence using the regression analysis shows FCPO price is the only significant independent
factors that affect the CPO price. While other independent variable shows insignificant result.
The result obtained from the study also shows there exist a significant long run and short run
relationships between the CPO price and FCPO price of the Malaysian Crude Palm oil. The
result of the causality test indicates that there is a strong relationship between the CPO and
FCPO prices. This means that any information flow regarding the price movement of the
Malaysian Crude Palm oil futures market will affect the Crude Palm oil price and not the
other way round.

Table of Contents

TITLE PAGE...............................................................................................................................
DECLARATION OF ORIGINAL WORK................................................................................ii
LETTER OF SUBMISSION....................................................................................................iii
ACKNOWLEDGEMENT........................................................................................................iv
ABSTRACT...............................................................................................................................v
CHAPTER 1: INTRODUCTION..............................................................................................1
1.1 Introduction......................................................................................................................1
1.2 Background of Study........................................................................................................2
1.3 Problem Statements..........................................................................................................6
1.4 Research Objectives.........................................................................................................9
1.4.1 Main Research Objective...........................................................................................9
1.4.2 Specific Research Objectives.....................................................................................9
1.5 Research Questions........................................................................................................10
1.5.1 Main Research Question..........................................................................................10
1.5.2 Specific Research Questions....................................................................................10
1.6 Significant of Study........................................................................................................10
1.7 Scope of Study................................................................................................................11
1.8 Summary.........................................................................................................................12
CHAPTER 2: LITERATURE REVIEW..................................................................................13
2.1 Introduction....................................................................................................................13
2.2 Literature Review on Topic............................................................................................13
2.3 Literature Review on Crude Palm Oil Price...................................................................14
2.3 Literature Review on Futures Crude Palm Oil Price......................................................18
2.4 Futures Crude Palm Oil Trading Volume and Open Interest..........................................20
CHAPTER 3: RESEARCH METHODOLOGY.....................................................................21
3.1 Introduction....................................................................................................................21
3.2 Sample and Data.............................................................................................................21
3.2.1 Population and sample.............................................................................................21
3.2.2 Data collection.........................................................................................................21
3.2.3 Variables...................................................................................................................23
3.3 Theoretical Framework...................................................................................................24
3.3.1 Hypothesis statement...............................................................................................24
3.4 Statistic and Econometric Method..................................................................................25

3.4.1 Descriptive analysis.................................................................................................26

3.4.2 Test for Stationary: Unit Root Test..........................................................................26
3.4.3 Test on assumptions.................................................................................................27
3.4.4 Correlation Coefficient............................................................................................29
3.4.5 Regression Analysis.................................................................................................30
3.4.6 Johansen System Cointegration test........................................................................32
3.4.7 Granger Causality Test.............................................................................................32
3.5 Summary.........................................................................................................................33
CHAPTER 4: FINDINGS........................................................................................................34
4.1 Introduction....................................................................................................................34
4.2 Descriptive analysis........................................................................................................34
4.3 Stationary test.................................................................................................................36
4.4 Test on Assumptions.......................................................................................................37
4.4.1 Normality Test.........................................................................................................38
4.4.2 Serial correlation of error term................................................................................38
4.4.3 Heteroskedasticity....................................................................................................39
4.4.4 Multicollinearity test................................................................................................39
4.4.5 RAMSEY test..........................................................................................................39
4.5 Correlation analysis........................................................................................................40
4.6 Multiple Regression Analysis.........................................................................................41
4.6.1 Model 1....................................................................................................................41
4.6.2 Model 2....................................................................................................................42
4.7 Johansen Systems Cointegration test..............................................................................43
4.8 Granger Causality...........................................................................................................44
4.9 Summary.........................................................................................................................44
CHAPTER 5: CONCLUSION AND RECOMMENDATION................................................46
5.1 Introduction....................................................................................................................46
5.2 Discussion.......................................................................................................................46
5.3 Conclusion......................................................................................................................47
5.4 Recommendation............................................................................................................49
5.4.1 Add More Macroeconomic Variables......................................................................49
5.4.2 Use Different Data Structure...................................................................................50
5.4.3 Have More Comprehensive Test..............................................................................50

5.4.4 Research on Other Countries...................................................................................50

REFERENCES.........................................................................................................................51
APPENDICES..........................................................................................................................55