Kushankur Dey and Debasish Maitra
It has become an ongoing debate whether Indian commodity futures markets can accommodate farmers. The purpose of this paper is to examine whether Indian commodity futures markets…
Abstract
Purpose
It has become an ongoing debate whether Indian commodity futures markets can accommodate farmers. The purpose of this paper is to examine whether Indian commodity futures markets help rationalize farmers’ price expectation. The study starts with questions on the efficiency and other roles of commodity futures markets.
Design/methodology/approach
From a sectoral standpoint and economic importance, the study considers pepper, coffee, and natural rubber (NR) futures and spot markets. The efficiency of futures markets, divergence/convergence and causality between futures and spot markets have been studied by employing co-integrations, error correction and causality models. The sample period of the data are taken from the inception of futures trading. These three commodities are also compared on the basis of trading at the futures markets vs spot markets.
Findings
Analysis shows that though pepper futures market is informationally efficient in price discovery, while coffee and NR spot markets do the process faster. Pepper and coffee futures and spot prices exhibit the convergence; NR shows a sign of divergence. Unidirectional causality from pepper futures to spot market is observed wherein the former was weakly exogenous to the latter and while, bidirectional causality is observed in coffee and rubber. Coffee spot appears weakly exogenous while this remains inconclusive in the case of NR.
Research limitations/implications
The authors analyzed the futures markets in rationalizing the spot market price in three plantation crops in India. In order to make the study more generalizable, further research is warranted in other commodities including those prices of which are government regulated.
Originality/value
The paper is unique in terms of understanding the interaction or interrelationship between futures markets and spot markets and drawing inferences about the role of futures markets in price formation in plantation commodities like pepper, coffee and NR.
Details
Keywords
The purpose of the paper is to study the explainability of expected and unexpected trade volume and open interest as information flow, and the asymmetric effects of unexpected…
Abstract
Purpose
The purpose of the paper is to study the explainability of expected and unexpected trade volume and open interest as information flow, and the asymmetric effects of unexpected shocks to the information flow on volatility in Indian commodity markets.
Design/methodology/approach
After having dissected into expected and unexpected components, the effects of trade volume and open interest on volatility are tested. A new interaction term is also added to measure asymmetry. Four commodities, namely, cumin, soy oil and pepper in food commodity category and guar seed in non-food commodity category are selected for the present study. These four commodities are selected based on their economic and trading importance, i.e. weight in the index and trading volume (liquidity).
Findings
It is mostly found that unexpected volatility is positively related to the volatility, and the effect of the unexpected component is more than the expected component of the trading volume. The expected open interest is negatively related to volatility while the unexpected open interest is found to be positively related in all the commodities. The effects of unexpected component are higher than the expected open interest. The effects of positive unexpected shocks to the trade volume are more than those of negative unexpected shocks. The evidence of asymmetry in unexpected shocks to open interest is inconclusive. However, the inclusion of volume of trade and open interest could not vanish away the volatility. This indicates that the trading volume and open interest are not the variable with mixed distribution. Thus, it contrasts the assumption of mixed distribution hypothesis, and they do not proxy the flow of information.
Practical implications
It is the unexpected information flow that matters more than the expected one. Positive unexpected shocks to trade volume are more influential than the negative shocks. However, trade volume and open interest are not good proxy of information flow in the Indian commodity markets. This study would definitely broaden the horizon of managers and policymakers to understand the volatility better.
Originality/value
The paper is unique in terms of understanding the effect of expected and unexpected trade volume and open interest and the asymmetric effects of unexpected shocks to volume and open interest in the Indian commodity markets.