Financial Risk Management

Rainfall Forecasting Announcement and Commodity Spot Price Fluctuation: Evidence from Six Selected Food Commodities with Reference to Indian Commodity Market

Article Details

Pub. Date	: December, 2020
Product Name	: The IUP Journal of Financial Risk Management
Product Type	: Article
Product Code	: IJFRM31220
Author Name	:Mohd Merajuddin Inamdar, Susanta Datta and Vinayak Karande
Availability	: YES
Subject/Domain	: Finance Management
Download Format	: PDF Format
No. of Pages	: 10

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Abstract

The paper evaluates the impact of rainfall forecast announcement on six selected commodity spot price fluctuation with reference to Indian commodity market. Using daily spot price data from January 2, 2017 to December 13, 2017, four research questions have been addressed by considering two rainfall forecasting announcement dates, April 18, 2017 and June 6, 2017, by the Indian Meteorological Department, Government of India. By adopting dummy regression, Bai-Perron (2003) multiple structural break point tests and lagged regression, the empirical results suggest that rainfall forecasting announcement is a very temporary phenomenon and there is no strong evidence of fluctuations in return on commodity spot prices. This observation is also supported by ARIMA modeling, where it has been found that the return on spot price fluctuation behavior can be explained better with the help of lower order moving average models like MA1, MA2, etc. The results are statistically parsimonious because they are consistent with the real-life fact that agriculture product pricing is subject to the matter of seasonality which can persist for a short span of time, and this observation has been supported by the finding from lagged regression that lag 1 is significant at 1% level in maximum cases. The policy suggestions are that there is a need to introduce weather derivatives in Indian market to hedge risk due to weather variability and the meteorological department should improve its penetration of information among traders and farmers to achieve price efficiency.

Introduction

India is an agrarian economy because agriculture makes significant contribution to the Gross Domestic Product (GDP), and with its allied sectors, it is undoubtedly the biggest livelihood provider in India. The need for observation and analysis of agriculture commodity prices is important for India because of significant dependence of output on the monsoon rains. Management of agriculture from a public policy perspective requires organization and planning