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The IUP Journal of Applied Finance
Price Discovery and Volatility Spillovers in Indian Wheat Market: An Empirical Analysis
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This paper examines the price discovery and volatility spillovers in the spot and futures wheat market in India. For this purpose, closing prices are taken as the sample data from June 1, 2013 to July 31, 2017 from National Commodity and Derivatives Exchange Limited (NCDEX) for both spot and futures wheat markets. The data is analyzed using unit root test, Granger causality test, Johansen cointegration test, Vector Error Correction Model (VECM), and Glosten-Jagannathan-Runkle Generalized Autoregressive Conditional Heteroskedasticity (GJR-GARCH) model to measure the price discovery and volatility spillovers. Granger causality test confirms that bidirectional causality exists between wheat spot and its underlying wheat futures market. Johansen cointegration test approves the long-term equilibrium relationship between wheat spot and wheat futures prices. The VECM shows that wheat futures market leads wheat spot market in price discovery process in the long run. It shows that the wheat futures market plays a dominant role and serves as a price discovery vehicle. The GJR-GARCH model exhibits the volatility spillover from wheat futures market (near month as well as next to near month) to wheat spot market, and wheat spot market to near to next month wheat futures market. The wheat futures market in India serves as a price discovery agent. The findings of the study give insights to the investors, regulators, policy makers and speculators on volatility, volatility spillover, long-term equilibrium, price discovery and the effect of futures market on spot market and vice versa in wheat market. This would help them make future policies with regard to practices/investments in wheat market, whether in spot or futures market.

 
 
 

Indian financial market can be broadly classified in terms of stock market, commodity market and foreign exchange market. Among all these financial markets, commodity market deals with a separate and valuable asset class like wheat (Sehgal et al., 2013). In India, two-thirds of the population is engaged in agriculture and allied activities. The people who are engaged in agricultural activities generate food, income opportunities and export earnings through agricultural commodities. Before the 1970s, the Indian commodity futures market was quite popular, but due to government regulations, restrictions and interventions, its growth went down. After the 1991 economic reforms, the government intervention has significantly reduced.

In this study, the central issue would be to analyze the wheat spot and futures market of India with respect to price discovery and volatility spillover mechanism. The motivation for selecting wheat market of India is due to its dominant presence in the world economy, in terms of production and consumption, after China.

 
 
 

Applied Finance Journal,Unit Root Test (ADF and PP Test), Johansenís Cointegration Test , Vector Error Correction Model.