Price Behaviour of Spot and Futures Markets for Commodities in India : Case of Soy Oil
Keywords:
Price Discovery
, Volatility Spillover, Cointegration, VECM, BEKK-GARCHC32
, C58, G13, Q02Paper Submission Date
, February 4, 2015, Paper sent back for Revision, April 7, Paper Acceptance Date, June 8, 2015.Abstract
The purpose of this paper was to study the relationship between the spot and futures prices of soy oil - the most actively traded commodity in the futures market in India. It aimed to test whether the futures market is fulfilling the price discovery function, which is important for providing an effective hedging platform. Data related to daily prices of spot and futures markets were used to analyze the long-run and short-run relationship. Cointegration, vector error correction model , and bivariate BEKK-GARCH model were applied to examine the relationship between the returns and volatilities of both the markets. The study found existence of a long-run equilibrium relationship between the spot and futures markets. We also observed that the futures market played a lead role in the price discovery function. In the short-run, the volatility spillover from the spot market to futures was found to be strong. The findings of this study are of significance to hedgers who can design appropriate hedging strategies based on the volatility behaviour.Downloads
Downloads
Published
How to Cite
Issue
Section
References
Baba Y., Engle, R. F., Kraft, D. F., & Kroner, K. F. (1991). Multivariate simultaneous generalized ARCH (Discussion Paper 92-5). Retrieved from https://econ.arizona.edu/docs/Working_Papers/Archives/1992/WP_92-5.pdf
Bollerslev, T. (1986). Generalized autoregressive conditional heteroskedasticity. Journal of Econometrics, 31 (1), 307-327.
Elumalai, K., Rangaswamy, N., & Sharma, R. K. (2009). Price discovery in India's agricultural commodity futures market. Indian Journal of Agricultural Economics, 64 (3), 315-323.
Fortenbery, T R., & Zapata, H. O. (1997). An evaluation of price linkages between futures and cash markets for cheddar cheese. Journal of Futures Markets, 17(3), 279-301. DOI: 10.1002/(SICI)1096-9934(199705)17:3<279::AID-FUT2>3.0.CO;2-F
Forward Markets Commission, Ministry of Finance, Government of India. (2010 - 2014). Fortnightly dissemination of data (March 31, 2010-14). Retrieved from http://www.fmc.gov.in/index2.aspx?slid=65&sublinkid=39&langid=2
Forward Markets Commission, Ministry of Finance, Government of India. (Various Years). Annual Reports : 2010- 2013. Retrieved from http://www.fmc.gov.in/index2.aspx?slid=65&sublinkid=39&langid=2
Garbade, K., & Silber, W. L. (1982). Price movements and price discovery in futures and cash markets. Review of Economics and Statistics, 65 (2), 289-297.
Granger, C. W. J. (1986). Developments in the study of cointegrated economic variables. Oxford Bulletin of Economics and Statistics, 48 (3), 213-228. DOI: 10.1111/j.1468-0084.1986.mp48003002.x
Hasbrouck, J. (1995). One security, many markets: Determining the contributions to price discovery. The Journal of Finance, 50 (4), 1175-1199. DOI: 10.1111/j.1540-6261.1995.tb04054.x
Koutmos, G., & Tucker, M. (1996). Temporal relationships and dynamic interactions between spot and futures stock markets. The Journal of Futures Markets, 16 (1), 55-69. DOI: 10.1002/(SICI)1096-9934(199602)16:1<55::AID-FUT3>3.0.CO;2-G
Kumar, B., & Pandey, A. (2011). Price discovery in emerging commodity markets: Spot and futures relationship in Indian commodity futures market. Bogazici Journal of Economics and Administrative Sciences, 25 (1), 79-121.
Kumar, S. (2004). Price discovery and market efficiency: Evidence from agricultural commodities futures markets. South Asian Journal of Management, 11 (2), 32-47.
Lin, C. - C., Chen, S. - Y., Hwang, D. - Y., & Lin C. - F. (2002). Does index futures dominate index spot ? Evidence from Taiwan market. Review of Pacific Basin Financial Markets and Policies, 5 (2), 255-275. DOI: 10.1142/S021909150200078X
Mattos, F., & Garcia, P. (2004). Price discovery in thinly traded markets: Cash and futures relationships in Brazilian agricultural futures markets. Paper presented at the NCR-134 Conference on Applied Commodity Price Analysis, April 19-20, 2004, Missouri. Retrieved from: http://ageconsearch.umn.edu/bitstream/19019/1/cp04ma02.pdf
Naik, G., & Jain, S. K. (2002, July 27). Indian agricultural commodity futures markets. Economic and Political Weekly, 37 (30), 3161-3173.
Rahman, N. M. N. A., Nawi, A. S., & Naziman, Y. H. N. M. (2012). The price discovery of the Malaysian crude palm oil futures markets. Journal of Applied Finance and Banking, 2 (4), 25-47.
Sahadevan, K. G. (2002). Derivatives and price risk management: A study of agricultural commodity futures in India. A Seed Money Project Report submitted to Indian Institute of Management, Lucknow, May 2002.
Sen, A. (2008). Report of the expert committee to study the impact of futures trading on agricultural commodity prices. Retrieved from http://www.fmc.gov.in/show_file.aspx?linkid=Abhijit%20Sen%20Report-85542553.pdf
Srinivasan, P., & Ibrahim, P. (2012). Price discovery and asymmetric volatility spillovers in Indian spot-futures gold markets. International Journal of Economic Sciences and Applied Research, 5 (3), 65-80.
Tse, Y. (1999). Price discovery and volatility spillovers in the DJIA index and futures markets. The Journal of Futures Markets, 19 (8), 911-930. DOI: 10.1002/(SICI)1096-9934(199912)19:8<911::AID-FUT4>3.0.CO;2-Q
Yang, J., & Leatham, D. J. (1999). Price discovery in wheat futures markets. Journal of Agricultural and Applied Economics, 31(2), 359-370.
