Price Discovery in Futures and Spot Commodity Markets in India

Biswal, Pratap Chandra (2008) Price Discovery in Futures and Spot Commodity Markets in India. TAPMI, Manipal.

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Abstract

The Indian commodity futures markets recorded a 373% growth during 2005-06. Despite this growth rate there are quite apprehensions about the effect of commodity futures on its underlying assets in India. To empirically examine the above issue, this study investigated the role of commodity futures market in performing the function of price discovery. The significance of price discovery depends upon a close relationship between futures and spot prices. The price linkage between futures market and spot market has been investigated using cointegration (Johansen, 1991) analysis. The cointegrating vectors define the long run equilibrium while error correction dynamics characterize the price discovery process, whereby markets attempt to find equilibrium. To perform the cointegration and error correction dynamics, this study used four futures and spot indices of Multi-Commodity Exchange (MCX), Mumbai. The results show that futures and spot markets in MCX are cointegrated and sharing a long run relationship. There is a causality flow from futures markets towards spot markets indicating information flow from futures to spot markets. At the same time, there is also a reverse information flow happening in case of metals signifying price discovery in both futures and spot markets.

Item Type:	TAPMI Working Papers
Uncontrolled Keywords:	Price Discovery; Commodity Markets; India
Subjects:	Economics Finance Finance > Capital Markets/Stock Marketing
Divisions:	Finance and Strategy
Depositing User:	Ms. Vanitha K
Date Deposited:	15 Nov 2018 06:23
Last Modified:	19 Nov 2018 10:57
URI:	http://tapmi.informaticsglobal.com/id/eprint/297

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