Financial Risk Management
Volatility Transmission Between Futures and Cash Markets of Indian Agri Commodities: An Empirical Study

Article Details
Pub. Date : Dec, 2018
Product Name : The IUP Journal of Financial Risk Management
Product Type : Article
Product Code : IJFRM21812
Author Name : Mehak Arora and Ramesh Chander
Availability : YES
Subject/Domain : Finance Management
Download Format : PDF Format
No. of Pages : 26

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Abstract

Future contracts in commodity market with limited maturities are used primarily to hedge risk in underlying commodity price and/or to enlarge potential to make profit taking advantage of price movements of the underlying instead of buying or selling of the commodity in the cash market. Based on daily price movements on the NCDEX from April 2012 through March 2017, this paper is an endeavor to scrutinize the efficiency of commodity market in India and unpredictable spillover effects in the spot and futures market with regard to agri commodities-guar seed, chana, soy oil and mustard seed. The results of the study are based on Augmented Dickey-Fuller (ADF) test, Johansen cointegration test, Vector Error Correction Model (VECM), and GARCH and EGARCH methodology. The results of the study indicate that long-term equilibrium relationship exists between the spot and the futures price of sample commodities. The result also indicates that the commodity futures market effectively serves the price discovery platform for the underlying spot market thus validating spillover of information from futures to spot markets. The results reported also point to the volatility transmission across the markets per se, however, it is the inverse transmission (from the futures market to the spot market) that was noticed to be more rigorous and robust. The findings reported have wider implications for the policy makers to address stress in the farm sector, facilitating farmers' participation in the agri commodities market to supplement income, as well for seasoned market participants in strategizing trade in agri commodities.


Description

Since time immemorial, exchange of agri commodity has been a vital part of mankind's interaction and evolution. Obviously, the prime reason has been that such a commodity corresponds to the elementary aspects of everyday life of human beings; thus swapping goods for goods has become an essential aspect of life. With the advent of market mechanism, the system of swapping has gone through diverse transformation and has now come into an era of futures trading. As of now, subsistence of a vivacious, vigorous and liquid commodity market is considered as a strong indication for the progress of an economy. In the perspective of a rising market like India, the expansion of capital and commodity futures market would rely on the efficacy of derivatives in managing risk.


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