South Asian Journal of Management

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An Assessment of the Causal Relationship and Price Dissemination of Commodity Spot and Futures Contracts


Affiliations
1 Assistant Professor, Department of Commerce, Sri Lakshmi College of Arts and Science, Bangaram, Thottiyam Post, Kallakurichi Taluk, Villupuram District, Tamil Nadu, India
2 Associate Professor, Department of Business and Management Studies, School of Arts and Sciences, St. George’s University, West Indies, Grenada
3 Assistant Professor, Department of Commerce, School of Business, Central University of Tamil Nadu, Thiruvarur 610 005, India
4 Assistant Professor, Department of International Business, School of Management, Pondicherry University, Puducherry 605 014, India
     

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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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  • An Assessment of the Causal Relationship and Price Dissemination of Commodity Spot and Futures Contracts

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Authors

Kirithiga S.
Assistant Professor, Department of Commerce, Sri Lakshmi College of Arts and Science, Bangaram, Thottiyam Post, Kallakurichi Taluk, Villupuram District, Tamil Nadu, India
Naresh G.
Associate Professor, Department of Business and Management Studies, School of Arts and Sciences, St. George’s University, West Indies, Grenada
Mahalakshmi S.
Assistant Professor, Department of Commerce, School of Business, Central University of Tamil Nadu, Thiruvarur 610 005, India
Thiyagarajan S
Assistant Professor, Department of International Business, School of Management, Pondicherry University, Puducherry 605 014, India

Abstract


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.

References