Does Trading Volume explain the Information Flow of Crude Palm Oil Futures Returns?

This study examines the role of trading volume in the crude palm oil (CPO) futures market as a proxy for information flow from the perspective of the mixture-of-distributions hypothesis (MDH). Using the data from January 2000 to April 2017, a symmetric GARCH model has been estimated, in which the residuals follow alternatively the normal Student-t and generalised error distribution. An alternative augmented model that consists of trading volume as an exogenous variable is estimated with the same error distributions. Our results suggest several conclusions: First, the trading volume could not act as a true proxy for information flow. This indicates that volume of futures trading contains relatively less price-sensitive information. Secondly, the inclusion of trading volume into the conditional variance equation with Student-t distributed errors is important for modelling purposes when the returns are leptokurtic and positively skewed. Hence, it can be concluded that the use of return and trading volume will enhance the current information set used by practitioners and analysts in pricing the CPO futures contract when there exists a high degree of leptokurtosis in the returns. This is the first study that validates the MDH in the context of the CPO futures market.