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Price discovery and convergence in the Indian commodities market

Author

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  • Vishwanathan Iyer
  • Archana Pillai

Abstract

Purpose - The purpose of this paper is to examine whether futures markets play a dominant role in the price discovery process. The rate of convergence of information from one market to another is analyzed to infer the efficiency of futures as an effective hedging tool. Design/methodology/approach - The paper uses a two‐regime threshold vector autoregression (TVAR) and a two‐regime threshold autoregression for six commodities. The regimes (or states) are defined around the expiration week of the futures contract. Findings - This paper finds evidence for price discovery process happening in the futures market in five out of six commodities. However, the rate of convergence of information is slow, particularly in the non‐expiration weeks. For copper, gold and silver, the rate of convergence is almost instantaneous during the expiration week of the futures contract affirming the utility of futures contracts as an effective hedging tool. In case of chickpeas, nickel and rubber the convergence worsens during the expiration week indicating the non‐usability of futures contract for hedging. Originality/value - This paper extends the framework developed by Garbadeet al.by superimposing a two‐regime TVAR model to quantify the price discovery process. It is the first paper to analyze the differential impact of price discovery and convergence during expiration week (compared to non‐expiration weeks) for the Indian commodities market.

Suggested Citation

  • Vishwanathan Iyer & Archana Pillai, 2010. "Price discovery and convergence in the Indian commodities market," Indian Growth and Development Review, Emerald Group Publishing Limited, vol. 3(1), pages 53-61, April.
    • Handle: RePEc:eme:igdrpp:v:3:y:2010:i:1:p:53-61
    DOI: 10.1108/17538251011035873
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    Citations

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    Cited by:

    1. Takeshi Inoue & Shigeyuki Hamori, 2014. "Market efficiency of commodity futures in India," Applied Economics Letters, Taylor & Francis Journals, vol. 21(8), pages 522-527, May.
    2. Sarveshwar Kumar Inani, 2018. "Price Discovery and Efficiency of Indian Agricultural Commodity Futures Market: An Empirical Investigation," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 16(1), pages 129-154, March.
    3. Ranajit Chakraborty & Rahuldeb Das, 2015. "Do the Spot and Futures Markets for Commodities in India Move Together?," International Journal of Financial Economics, Research Academy of Social Sciences, vol. 4(3), pages 150-159.
    4. Shashi Gupta & Himanshu Choudhary & D. R. Agarwal, 2018. "An Empirical Analysis of Market Efficiency and Price Discovery in Indian Commodity Market," Global Business Review, International Management Institute, vol. 19(3), pages 771-789, June.
    5. repec:rej:journl:v:16:y:2013:i:47:p:211-228 is not listed on IDEAS
    6. Jena, Sangram Keshari & Tiwari, Aviral Kumar & Hammoudeh, Shawkat & Roubaud, David, 2019. "Distributional predictability between commodity spot and futures: Evidence from nonparametric causality-in-quantiles tests," Energy Economics, Elsevier, vol. 78(C), pages 615-628.
    7. Muneer Shaik & Abhiram Kartik Lanka & Gurmeet Singh, 2021. "Analysis of lead-lag relationship and volatility spillover: evidence from Indian agriculture commodity markets," International Journal of Bonds and Derivatives, Inderscience Enterprises Ltd, vol. 4(3), pages 258-279.
    8. Joseph, Anto & Sisodia, Garima & Tiwari, Aviral Kumar, 2014. "A frequency domain causality investigation between futures and spot prices of Indian commodity markets," Economic Modelling, Elsevier, vol. 40(C), pages 250-258.
    9. Raushan Kumar, 2017. "Price Discovery in Some Primary Commodity Markets in India," Economics Bulletin, AccessEcon, vol. 37(3), pages 1817-1829.
    10. P., Srinivasan, 2011. "Price Discovery and Volatility Spillovers in Indian Spot-Futures Commodity Market," MPRA Paper 47412, University Library of Munich, Germany.

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