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Price Mean Reversion and Seasonality in Malaysia’s Crude Palm Oil Futures<br />

Kong Shuenn Ying<br />

Supervisor: Dr. Hassilah Binti Salleh<br />

Bachelor of Science (Financial Mathematics)<br />

School of Informatics and Applied Mathematics<br />

Future market, in particular for agricultural commodity becomes popular due to its<br />

uncertainty changing in global food prices and high food demand. To capture future prices<br />

movement, a mathematical model is essential. Hence, the main purpose of this paper is<br />

to model empirically agriculture commodity future prices. Therefore, a Schwartz Model is<br />

generalized by incorporating factors of mean-reversion and seasonality. Next, a closedform<br />

solution for future pricing is derived from that model. Results of parameters<br />

estimation are obtained based on daily historical observations of crude palm oil futures<br />

(FCPO) from Bursa Malaysia by using Maximum Likelihood method. Finally, an empirical<br />

comparison is made between the estimated and actual prices using the Root-Mean-<br />

Square Error (RMSE) method. It is expected that the proposed model fits actual FCPO<br />

prices.<br />

810 | UMT UNDERGRADUATE RESEARCH DAY 2018

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