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Testing for weak-form efficiency of Crude Palm Oil Spot and Futures Markets: New Evidence from a GARCH Unit Root Test with Multiple Structural Breaks

Lean, Hooi Hooi and Smyth, Russell (2014): Testing for weak-form efficiency of Crude Palm Oil Spot and Futures Markets: New Evidence from a GARCH Unit Root Test with Multiple Structural Breaks.

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Abstract

There is a sizeable literature that tests for weak-form efficiency in commodity and energy spot and futures prices. While many studies now allow for multiple structural breaks to address the criticism that conventional unit root tests have low power to reject the unit root null in the presence of structural change, the extant literature overlooks the fact that conventional unit root tests are biased in the presence of conditional heteroskedasticity. We apply a recently developed GARCH unit root test with multiple structural breaks to crude palm oil spot and futures prices and find much more evidence against weak-form efficiency than with tests that fail to allow for conditional heteroskedasticity. Our results point to the importance of allowing for heteroskedasticity when testing for efficiency in commodity and energy spot and futures prices.

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