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Article
Publication date: 11 October 2021

Manogna R.L. and Aswini Kumar Mishra

Market efficiency leads to transparent and fair price discovery of commodity markets, thus enhancing the value chain for competitive benefit. The purpose of this paper is…

Abstract

Purpose

Market efficiency leads to transparent and fair price discovery of commodity markets, thus enhancing the value chain for competitive benefit. The purpose of this paper is to investigate the market efficiency of Indian agricultural commodities at spot, futures and mandi markets apart from exploring price risk management in these markets.

Design/methodology/approach

This study uses Johansen co-integration, vector error correction model and granger causality for analyzing market efficiency of the nine most liquid agricultural commodities across three markets, namely, spot, futures and mandi. All these nine commodities are traded on National Commodity and Derivatives Exchange.

Findings

The statistical results indicate price discovery exists in the mandi market and spot market leading to futures prices. Mandi price returns are seen to negatively influence futures returns in the case of cotton seed, guar seed and spot returns in the case of jeera, coriander and chana. For castor seed, the three markets are seen to have no long run relationship. The results of Granger causality reveal short run relationship between all the three markets in the case of soybean seed and coriander. In these commodities, prices in all three markets are capable of predicting the prices in the other markets. For the case of cottonseed, Rape Mustard seed, jeera, guar seed, the results indicate unidirectional causality between the mandi markets and the other two markets.

Research limitations/implications

These results shall facilitate policymakers to explore intervention through integrated agri-platform (IAP) in price discovery and market efficiency.

Practical implications

The results of this study are useful in understanding the price discovery of mandi markets and its role in the spot and futures market. Agricultural commodities price discovery depends upon the integration of all these three markets. Introduction of IAP as described in the paper shall facilitate price risk management apart from improving the efficiency of price discovery.

Originality/value

To the best of the knowledge, this is the first study considering mandi, spot and futures prices in the price discovery process in India. In addition, this study found the role of mandi markets in serving the economic function of price discovery and price risk management. Hence, suggests for policy intervention for Indian agricultural commodities to manage price risk.

Details

Journal of Modelling in Management, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1746-5664

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Article
Publication date: 2 June 2021

Saji Thazhugal Govindan Nair

This paper aims to investigate price responses and volatility spillovers between commodity spot and futures markets. The study ultimately seeks the evidence-based claims…

Abstract

Purpose

This paper aims to investigate price responses and volatility spillovers between commodity spot and futures markets. The study ultimately seeks the evidence-based claims on the efficiency of the long run and short run horizontal price transmissions from futures markets to spot markets.

Design/methodology/approach

This study used the most recent daily price series of pepper, cardamom and rubber, during the period 2004–2019, use “cointegration-ECM-GARCH framework” and verify the persisting validity of the “expectancy theory” of commodity futures pricing.

Findings

The results offer overwhelming evidence of futures market dominance in the price discoveries and volatility spillovers in spot markets. However, this paper finds asymmetric responses between cash and futures prices across markets. The hedging efficiency of futures contracts is commodities specific’ where spices futures are more efficient than the rubber futures.

Practical implications

The study passes on vital information to the producers and traders of spices and rubber who have a potential interest in the use of futures contracts to make profits from arbitrage between futures and cash markets.

Originality/value

The paper is unique in terms of understanding asymmetric price linkages in markets for plantation crops.

Details

Indian Growth and Development Review, vol. 14 no. 2
Type: Research Article
ISSN: 1753-8254

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Book part
Publication date: 27 August 2014

Helen Xu, Eric C. Lin and John W. Kensinger

The issue of risk premium in commodity futures market has long been examined since Keynes’ (1930) normal backwardation hypothesis. We further examine the normal…

Abstract

The issue of risk premium in commodity futures market has long been examined since Keynes’ (1930) normal backwardation hypothesis. We further examine the normal backwardation hypothesis in the gold futures market, using a Goldman Sachs Commodity Index (GSCI) approach. We find no evidence that risk premium exists in the gold futures market over the period 1980–2005. Finally, we provide further explanations as to why there is no risk premium in the gold futures market by investigating the actual gold futures positions taken by gold mining firms. We contend that lack of hedging activity by gold miners may explain the lack of risk premium in gold market.

Details

Research in Finance
Type: Book
ISBN: 978-1-78190-759-7

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Article
Publication date: 27 May 2020

Manogna R L and Aswini Kumar Mishra

Price discovery and spillover effect are prominent indicators in the commodity futures market to protect the interest of consumers, farmers and to hedge sharp price…

Abstract

Purpose

Price discovery and spillover effect are prominent indicators in the commodity futures market to protect the interest of consumers, farmers and to hedge sharp price fluctuations. The purpose of this paper is to investigate empirically the price discovery and volatility spillover in Indian agriculture spot and futures commodity markets.

Design/methodology/approach

This study uses Granger causality, vector error correction model (VECM) and exponential generalized autoregressive conditional heteroskedasticity (EGARCH) to examines the price discovery and spillover effects for nine most liquid agricultural commodities in spot and futures markets traded on National Commodity and Derivatives Exchange (NCDEX).

Findings

The VECM results show that price discovery exists in all the nine commodities with futures market leading the spot in case of six commodities, namely soybean seed, coriander, turmeric, castor seed, guar seed and chana. Whereas in case of three commodities (cotton seed, rape mustard seed and jeera), price discovery takes place in the spot market. The Granger causality tests indicate that futures markets have stronger ability to predict spot prices. Supporting these, the results from EGARCH volatility test reveal that there exist mutual spillover effects on futures and spot markets. Thus, it could be inferred that futures market is more efficient in price discovery of agricultural commodities in India.

Research limitations/implications

These results can help the market participants to benefit by hedging out the uncertainty and the policymakers to design futures contracts to improve the efficiency of the agricultural commodity derivatives market.

Practical implications

The findings provide fresh view on lead–lag relationship between future and spot prices using the latest data confirming that futures market indeed is dominant in price discovery.

Originality/value

There are very few studies that have explored the efficiency of the agricultural commodity spot and futures markets in India using both price discovery and volatility spillover in a detailed manner, especially at the individual agriculture commodity level.

Details

Journal of Agribusiness in Developing and Emerging Economies, vol. 10 no. 4
Type: Research Article
ISSN: 2044-0839

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Article
Publication date: 1 October 2018

Kirithiga S., Naresh G. and Thiyagarajan S.

The commodity and equity derivatives have a close resemblance between them in trade practices and mechanisms, which makes it easy for the investors to combine these two…

Abstract

Purpose

The commodity and equity derivatives have a close resemblance between them in trade practices and mechanisms, which makes it easy for the investors to combine these two assets classes for building up their portfolio. The diversification of investment among asset classes builds some relation between them. The integration of market within a country is necessary to bring in a smooth and balanced economic growth. Thus, the purpose of this paper is to examine the spillover between the equity and commodity futures markets which will be helpful not only for the investors but also for the policy makers, producers and the regulators.

Design/methodology/approach

To examine the spillover between the equity and commodity market, the major benchmarking indices of these markets, namely COMDEX of MCX, Dhaanya of NCDEX and NIFTY 50 of NSE, were chosen. NIFTY 50 index was chosen as representative of equity market due to its composition of most active constituent stocks than any other broad market index of Indian stock market. As the commodity market indices are not been traded, their constituent commodities were taken for the study. Thus, 11 MCX-COMDEX constituents such as Gold, Silver, Copper, Zinc, Aluminum, Nickel, Lead, Crude oil, Natural gas, Kapaskhali and Mentha oil and eight NCDEX-Dhaanya constituents such as Castor seed, Chana, Cotton seed oilcake, Jeera, Mustard seed, Refined soy oil, Turmeric and Wheat futures prices were taken against the NIFTY 50 futures prices with daily trading data for ten years starting from January 1, 2006 till December 31, 2015 to analyze their spillover effect. The return series data were used to test the spillover between equity and commodity futures market as it gives the crux of investors’ diversification through the Vector Autoregression (VAR) model and verified with Impulse Response Function by testing the null hypothesis, H0, that there is no return spillover between the equity and commodity futures market.

Findings

The investors move from equity to commodity when there is a threat in equity market and vice versa, thereby diversify their risk for those commodities which are vulnerable to global and domestic pressures in the economy. Investigating the spillover between equity and commodity market gives an insight of market integration effect. A nation can achieve its economic growth easily when its markets are integrated.

Research limitations/implications

The commodity indices are still notional indices in the market; therefore, individual constituent commodities of commodities indices were considered with the benchmarking equity futures index, which is one of the limitations of the study.

Practical implications

The integration of market within a country is necessary to bring in a smooth and balanced economic growth.

Originality/value

Most of the past studies dealt only with few commodities and equities and not with the broad-based benchmarking indices. This paves way for enquiry into the commodity and equity markets integration with the major constituent commodities traded in the economy. Hence, this paper looks into the presence of spillover between the equity and commodity markets. The VAR model is verified with the impulse response function which explains the reaction of any dynamic system in response to a pulse change in another. The impulse response function is presented graphically for easy and better understanding.

Details

Benchmarking: An International Journal, vol. 25 no. 7
Type: Research Article
ISSN: 1463-5771

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Article
Publication date: 11 November 2014

Tarun Kumar Soni

The purpose of this paper is to study the market efficiency, unbiasedness and the direction of causality among four agricultural commodity futures contracts for a…

Abstract

Purpose

The purpose of this paper is to study the market efficiency, unbiasedness and the direction of causality among four agricultural commodity futures contracts for a forecasting horizon of 28 days, 56 days and 84 days which are traded at National Commodity and Derivatives Exchange Ltd.

Design/methodology/approach

To analyse the efficiency of futures market in Indian scenario, we focus on maize, chickpea, soybean and wheat which are among the most important agricultural commodities traded in India. In the first step, Augmented Dickey-Fuller test and nonparametric Phillips-Perron approaches have been used to examine the stationarity of all futures and spot price series. After testing the presence of cointegration in futures and spot series using Johansen’s Cointegration approach, the joint restrictions of β 0=0, β 1=1 and β 1=1 on the cointegrating vectors were imposed to test whether the futures price is an unbiased predictor of spot at contract maturity. In the next step, linear Toda and Yamamoto (1995) and the nonparametric Diks and Panchenko (2006) causality tests were applied to examine the direction of causality. Finally, nonlinear test were applied on the vector error correction model (VECM) residuals to investigate whether any remaining causality is strictly nonlinear in nature.

Findings

The results of cointegration tests between futures and spot prices of the selected agricultural commodities indicated a long term relationship do exist in three out of four futures contracts. However, the Wald tests results on the cointegrating vectors indicate markets as inefficient and biased. Further, analysis of short-term relationship using alternate tests of causality do not give consistent results for same commodity series indicating that results may vary due to alternate measures and specifications. Finally, if we consider the results of Diks-Panchenko test on the filtered VECM-residuals, results provide evidence that if cointegration is taken into account; neither spot nor future leads or lags the other consistently.

Research limitations/implications

The results are based on the sample of four agricultural futures commodity contracts. The study can be extended to a larger sample of contracts and relative efficiency of each contract can be explored.

Originality/value

There are very few studies that have explored the efficiency, unbiasedness and direction of causality using both linear and nonlinear techniques for Indian agriculture commodity futures market for different forecasting horizons.

Details

Journal of Agribusiness in Developing and Emerging Economies, vol. 4 no. 2
Type: Research Article
ISSN: 2044-0839

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Article
Publication date: 31 May 2013

Brajesh Kumar and Ajay Pandey

In this paper, the authors aim to investigate the short‐run as well as long‐run market efficiency of Indian commodity futures markets using different asset pricing models…

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Abstract

Purpose

In this paper, the authors aim to investigate the short‐run as well as long‐run market efficiency of Indian commodity futures markets using different asset pricing models. Four agricultural (soybean, corn, castor seed and guar seed) and seven non‐agricultural (gold, silver, aluminium, copper, zinc, crude oil and natural gas) commodities have been tested for market efficiency and unbiasedness.

Design/methodology/approach

The long‐run market efficiency and unbiasedness is tested using Johansen cointegration procedure while allowing for constant risk premium. Short‐run price dynamics is investigated with constant and time varying risk premium. Short‐run price dynamics with constant risk premium is modeled with ECM model and short‐run price dynamics with time varying risk premium is modeled using ECM‐GARCH in‐Mean framework.

Findings

As far as long‐run efficiency is concerned, the authors find that near month futures prices of most of the commodities are cointegrated with the spot prices. The cointegration relationship is not found for the next to near months futures contracts, where futures trading volume is low. The authors find support for the hypothesis that thinly traded contracts fail to forecast future spot prices and are inefficient. The unbiasedness hypothesis is rejected for most of the commodities. It is also found that for all commodities, some inefficiency exists in the short run. The authors do not find support of time varying risk premium in Indian commodity market context.

Originality/value

In context of Indian commodity futures markets, probably this is the first study which explores the short‐run market efficiency of futures markets in time varying risk premium framework. This paper also links trading activity of Indian commodity futures markets with market efficiency.

Details

Journal of Indian Business Research, vol. 5 no. 2
Type: Research Article
ISSN: 1755-4195

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Article
Publication date: 12 March 2018

Debashish Maitra

The purpose of this paper is to understand the volatility in commodity futures and spot markets. The study starts with a few questions: first, the effect of seasonality on…

Abstract

Purpose

The purpose of this paper is to understand the volatility in commodity futures and spot markets. The study starts with a few questions: first, the effect of seasonality on the volatility is studied. Thereafter, the presence of structural breaks in the variance is identified. At last the seasonality, structural shifts and spillover effects are examined together to find out their effects on volatility.

Design/methodology/approach

The methodology heavily employs econometric tools and techniques. The monthly seasonal dummies are incorporated to identify the effects of seasonality on volatility. Then, the presence of break in volatility is tested by cumulative sum of squares (CUSUM test), followed by generalized autoregressive conditional heteroscedastictity and EGARCH models are measured by including seasonal dummies, break dummies and the residuals of other market in the variance equation to determine spillover effects.

Findings

It is found that the effects of seasonality on volatility cannot be ignored as the effects are significant. The presence of asymmetry is detected in all the commodities. The presence of seasonality and structural breaks in the variance equation are statistically able to reduce the volatility but the magnitude is very negligible with an exception in cumin futures markets. Bi-directional volatility spillover between futures and spot markets is observed in all the commodities and the effect of spillover is more from spot markets to the futures markets.

Research limitations/implications

This study is limited to a few agro commodities which are well traded. This study could have been extended to the other thinly traded commodities. This study has also taken only near month futures contracts as it contains more information but the same could have been studied by taking far month contracts also.

Originality/value

The present study attempted to understand the conjugated effects of seasonality, structural breaks and spillover on volatility of commodity markets which is not apparent in the previous studies. This study has also employed methodological rigor to identify the breaks in the variance equation. In addition to this it has also investigated whether Indian commodity futures markets are informationally more efficient than the spot markets.

Details

Journal of Agribusiness in Developing and Emerging Economies, vol. 8 no. 1
Type: Research Article
ISSN: 2044-0839

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Article
Publication date: 2 August 2011

Jabir Ali and Kriti Bardhan Gupta

In line with the ongoing global and domestic reforms in agriculture and allied sectors, the Indian Government is reducing its direct market intervention and encouraging…

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1924

Abstract

Purpose

In line with the ongoing global and domestic reforms in agriculture and allied sectors, the Indian Government is reducing its direct market intervention and encouraging private participation based on market forces. This has led to increased exposure of agricultural produce to price and other market risks, which consequently emphasize the importance of futures markets for price discovery and price risk management. The purpose of this paper is to analyze the efficiency of agricultural commodity markets by assessing the relationships between futures prices and spot market prices of major agricultural commodities in India.

Design/methodology/approach

The efficiency of the futures market for 12 agricultural commodities, traded at one of the largest commodity exchanges of India, i.e. National Commodity & Derivatives Exchange Ltd, has been explored by using Johansen's cointegration analysis and Granger causality tests. Unit root test procedures such as Augmented Dickey‐Fuller and non‐parametric Phillips‐Perron were initially applied to examine whether futures and spot prices are stationary or not. The hypothesis, that futures prices are unbiased predictors of spot prices has been tested using econometric software package.

Findings

Results show that cointegration exists significantly in futures and spot prices for all the selected agricultural commodities except for wheat and rice. This suggest that there is a long‐term relationship between futures and spot prices for most of the agricultural commodities like maize, chickpea, black lentil, pepper, castor seed, soybean and sugar. The causality test further distinguishes and categorizes the commodities based on direction of relationship between futures and spot prices. The analysis of short‐term relationship by causality test indicates that futures markets have stronger ability to predict subsequent spot prices for chickpea, castor seed, soybean and sugar as compared to maize, black lentil and pepper, where bi‐directional relationships exist in the short run.

Practical implications

The results of this study are useful for various stakeholders active in agricultural commodities markets such as producers, traders, commission agents, commodity exchange participants, regulators and policy makers.

Originality/value

There are very few studies that have explored the efficiency of the commodity futures market in India in a detailed manner, especially at individual commodity level.

Details

Agricultural Finance Review, vol. 71 no. 2
Type: Research Article
ISSN: 0002-1466

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Article
Publication date: 29 July 2014

Mantu Kumar Mahalik, Debashis Acharya and M. Suresh Babu

– The purpose of this paper is to investigate empirically the price discovery and volatility spillovers in Indian spot-futures commodity markets.

Abstract

Purpose

The purpose of this paper is to investigate empirically the price discovery and volatility spillovers in Indian spot-futures commodity markets.

Design/methodology/approach

The study has used four futures and spot indices of Multi-Commodity Exchange, Mumbai. The study also employs vector error correction model (VECM) and bivariate exponential Garch model (EGARCH) to analyze the price discovery and volatility spillovers in Indian spot-futures commodity market.

Findings

The VECM shows that agriculture future price index (LAGRIFP), energy future price index (LENERGYFP) and aggregate commodity index (LCOMDEXFP) effectively serve the price discovery function in the spot market implying that there is a flow of information from future to spot commodity markets but the reverse causality does not exist. There is no cointegrating relationship between metal future price index (LMETALFP) and metal spot price index (LMETALSP). Besides the bivariate EGARCH model indicates that although the innovations in one market can predict the volatility in another market, the volatility spillovers from future to the spot market are dominant in the case of LENERGY and LCOMDEX index while LAGRISP acts as a source of volatility toward the agri-futures market.

Research limitations/implications

The results are aggregate in nature. Further study at disaggregated level will provide further insights on behavior of specific commodity prices and the price discovery process.

Originality/value

The paper provides useful information about the evolution and structures of futures commodity trading in India, related literature and relevant methodology concerning the hypotheses.

Details

Journal of Advances in Management Research, vol. 11 no. 2
Type: Research Article
ISSN: 0972-7981

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