Future–Spot Relationship in Commodity Market: A Comparison Across Commodity Segments in India

This study aims to analyse the future–spot pricing relationship in the context of most actively traded commodities traded on Multi Commodity Exchange of India, which is the leading commodity exchange in the country today. The study intends to compare the pricing relations of three popular commodity segments, that is, bullion and metal, energy and agricultural segments, to explore whether future–spot pricing relationships are similar for all commodity segments or not. The study has applied vector autoregressive (VAR) model on a sample of 13 commodities, categorized as 7 commodities from bullion and metal segment, 2 commodities from energy segment and 4 commodities from agricultural segment. The results of VAR model show that in India, the non-agricultural commodity sector constituting of bullion, metal and energy commodities behave close to each other, but the behaviour of agricultural commodities is quite different from non-agricultural commodities. As regards non-agricultural commodities, the futures market plays a quite dominant and significant role as compared to the spot markets. However, in case of agricultural commodities, the futures market has a comparatively less dominant and strong role, and their spot market also plays an equally strong role. A comparative study of the pricing relationships existing among the three commodity segments will be extremely helpful for farmers, traders, investors as well as the portfolio managers in choosing the most profitable commodity classes for trading, investment and portfolio optimization. Regulators and policymakers can plan and implement an appropriate regulatory framework to strengthen these markets, especially agricultural commodity market, to promote economic growth.