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An Empirical Analysis of Price Discovery in Indian Commodity Markets

In: Managing in Recovering Markets

Author

Listed:
  • Shelly Singhal

    (Management Development Institute)

  • Sunil Ashra

    (Management Development Institute)

Abstract

In an efficient market, the prices should be reflected simultaneously in futures and spot markets without a time lag. However, in the practical world, there is often supposed to be some time lag between the information spillover between spot and futures markets. In this study an attempt has been made to empirically validate the flow of information and price discovery in the context of Indian commodity markets. Daily data from the four spot and four futures indices of MCX for a span of 8 years from June 2006 to 2013 has been analyzed for the study. Engle–Granger (EG) procedure and vector error correction model (VECM) have been employed in the empirical analysis. The results of the study reveal that cointegration exists in all the spot and futures indices except for MCXAGRI. After the data set was reduced up to June 30, 2012, MCXAGRI was also found to be cointegrated. For the three different commodities, the information flow was found to be different. In agriculture commodities the information flow was found to be bidirectional. In MCXMETAL the spillover effect was found from futures market to spot market, and the reverse was found for MCXENERGY. In COMDEX, a weighted index of all three different markets, the price discovery takes place from the spot market to the futures market. However, the results are mixed and not unambiguous on the direction of spillover effect for all the commodities.

Suggested Citation

  • Shelly Singhal & Sunil Ashra, 2015. "An Empirical Analysis of Price Discovery in Indian Commodity Markets," Springer Proceedings in Business and Economics, in: S. Chatterjee & N.P. Singh & D.P. Goyal & Narain Gupta (ed.), Managing in Recovering Markets, edition 127, chapter 0, pages 41-62, Springer.
    • Handle: RePEc:spr:prbchp:978-81-322-1979-8_4
    DOI: 10.1007/978-81-322-1979-8_4
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