Recession effect in pricing efficiency of rubber futures: the emerging market’s experience

Abstract

Purpose

The purpose of this paper is to investigate the recession effects in market efficiency of natural rubber futures contracts traded in India.

Design/methodology/approach

The research draws inferences from Granger causality and Engle–Granger cointegration tests, which are administered separately on 14 year daily price data spanning into two distinct, non-overlapping time series of 2004–2008 and 2009–2017.

Findings

Analysis shows that rubber futures market is informationally efficient in price discovery. The results of cointegartion tests indicate that a long-term relationship does exist between futures and spot prices of the natural rubber in India. The recession effects in the market efficiency of rubber futures contracts are evident from the increase in optimal hedge ratios estimated with the cointegration methodology.

Research limitations/implications

The study pursues a simple cointegration methodology to assess the causal relations between spot and futures market prices in the Indian context. Future studies investigating the long-run causal relations, with error correction framework, between spot and future prices of rubber from other leading rubber producing countries can validate the findings more on this issue.

Practical implications

The research expects to pass on vital information inputs on the implications of future contracts to rubber traders for managing their portfolios. The study of this kind definitely will be a great help to farmers and exporters who are potentially interested in gaining access to a hedging vehicle.

Originality/value

The paper is unique in terms of understanding the effects of economic recession in information efficiency of futures market. Moreover, a limited number of studies have explored the functional utilities of rubber futures in emerging market context.

Citation

Thazhugal Govindan Nair, S. (2019), "Recession effect in pricing efficiency of rubber futures: the emerging market’s experience", Journal of Agribusiness in Developing and Emerging Economies, Vol. 9 No. 5, pp. 503-519. https://doi.org/10.1108/JADEE-06-2018-0075