The study examines the informational efficiency of the Malaysian crude palm oil futures contracts by separating the futures prices according to their maturity life cycle. If futures price formation follows the rational expectation, then information will flow from futures to spot and not the other way round. The results are generally consistent with the expectations. All distant month error terms in spot equation are statistically significant for the three sub-samples (1987-89, 1990-92 and 1996-98). The findings are also consistent with the notion that all expectations will converge to the terminal month price and that the spot market plays a dominant role along with futures market in adjusting to each other. These findings are consistent with a matured commodity futures market microstructure.

Malaysia is the world's largest producer of palm oil. In the year 2000, it accounted for 51.5% of the world production and 65.1% of the world export of palm oil (Malaysian Palm Oil Board (MPOB), 2001). Palm oil accounts for about 20.4% of the world's vegetable oil production. These statistics show the economic importance of the palm oil sector in the Malaysian economy and trade. Traditionally futures market played an important role in risk management and in price stabilization in the cash market. Therefore, it would be beneficial to examine the effectiveness of the crude palm oil futures, particularly in price discovery, which is an important stabilization factor of the cash market.

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