Forecasting high magnitude price movement of crude palm oil futures by identifying the breaching of price equilibrium through price distribution mining

Abstract

High magnitude of price fluctuation in crude palm oil has been a major challenge haunting small planters, plantation companies, investors, and all the up-stream and down-stream industry players. The severe price movements over the past few years has negatively impacted all the industry participants, especially in their decision making process concerning risk management and mitigation. This paper presents an approach of identifying price equilibrium for crude palm oil through the mining of historical price distribution, thus fostering the forecasting of potential high magnitude price movement upon the breaching of the price equilibrium. Experiment was conducted on historical price data of crude palm oil futures over the period of sixteen years to access its competency in identifying price equilibrium, and forecasting the magnitude of price movement after the breaching of price from the equilibrium level. Evaluation has been done to scrutinize the characteristic of price distribution, and the amount of price data used in forming the distribution. The outcome of the experiment reveals a promising performance demonstrating the capability to forecast high magnitude price movement of crude palm oil. This study constitutes a novel approach of using price distribution in price movement analysis, and this will aid the analysis process in financial decision making routine.