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An Assessment of the Causal Relationship and Price Dissemination of Commodity Spot and Futures Contracts
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The task of price discovery of commodity futures depends on the manner in which new information is reflected on the change in either their futures or spot prices. In India, the spot market for commodities is not exchange traded, rather they are still the fragmented local markets called mandis; whereas the futures market is exchange traded. This brings to light the stakeholders’ query of whether price discovery is a phenomenon in the Indian futures market. If it does not fulfill the function of price discovery, then there is no purpose for its existence. Market participants including hedgers, speculators and arbitrageurs try to benefit from the price movements and their causality. This paper deals with the aim of finding out whether any causality exists among the commodity spot and futures in India. Commodities futures traded in two major Indian bourses MCX and NCDEX were tested over a period of 10 years between 2006 and 2015. After analysis, the authors found a causal relationship through Granger’s causality that evidenced the integration of futures and spot markets with a unidirectional information flow among them. Results also suggested that Government and policy makers need to undertake measures to monitor and control excessive speculation in the futures market, effective implementation of which would help in avoiding inflationary pressures on commodity prices in the spot market.
Keywords
Causality, Commodity, Futures, Spot, Price Dissemination, Risk Mitigation.
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