Impact Analysis of the External Shocks on the Prices of Malaysian Crude Palm Oil: Evidence from a Structural Vector Autoregressive Model

• Published in: Mathematics (Basel) 2022-12, Vol.10 (23), p.4599
• Main Authors: Sabri, Mohd Syafiq, Khalid, Norlin, Azam, Abdul Hafizh Mohd, Sarmidi, Tamat
• Format: Article
• Language: English
• Subjects: Analysis; Autoregression (Statistics); Autoregressive models; Commodities; Coronaviruses; COVID-19; Crude oil; Decision making; Economic conditions; economic policy uncertainty index; Edible oils; Empirical analysis; Epidemics; Foreign exchange rates; GDP; Gross Domestic Product; Impact analysis; infectious disease volatility tracker; Infectious diseases; International trade; Macroeconomics; News; Oils & fats; Palm oil; Pandemics; Perception; Petroleum industry; Prices and rates; Pricing; Response functions; Shortages; Software; Stock exchanges; structural vector autoregressive (SVAR); Supply & demand; Supply and demand; Supply shocks; Variables; Vector spaces; Vegetable oils; Volatility
• ISSN: 2227-7390; 2227-7390
• DOI: 10.3390/math10234599

Palm oil prices, similar to other edible oils and commodity prices, are highly sensitive to external shocks which have become particularly prominent in the wake of COVID-19 pandemic. The non-stationary nature of the palm oil price complicates the modelling and forecasting of its behaviour. This study investigates the impact of the external and internal shocks on Malaysian palm oil (MPO) prices using the SVAR methodology. The SVAR model utilised in this study is unique in that it employs the news-based indices called the Infectious Disease Volatility Tracker (IDVT) and the Economic Policy Uncertainty Index (EPUI) as parts of the time series. News-based indices can potentially uncover essential proxies for economic and policy conditions, as well as portend the investment decision-making and in turn the commodity prices. The rationale behind this choice is to capture the impact from perception and news-based indices on the Malaysian palm oil prices. The empirical result from impulse–response function (IRF) shows that the shock in IDVT has a significant positive impact on Malaysian palm oil prices suggesting the MPO is exposed to the external factor. In addition, amongst the external variables tested, IDVT shows the longest lasting and highest positive impact on Malaysian palm oil prices. These results are in accordance with forecast error variance decomposition which indicates that IDVT shock can explain a huge portion of MPO prices especially over a longer period. The model specified in this study is also sufficiently stable and robust. This study contributes to the literature the significance of news-based indices and their capability in influencing public perception on the current macroeconomic condition, hence influencing the decision-making process of economic agents.