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Futures Market Efficiency in Price Discovery and Dissemination

In: Farmers’ Participation in India’s Futures Markets

Author

Listed:
  • Kushankur Dey

    (Indian Institute of Management Lucknow)

  • Vasant P. Gandhi

    (Indian Institute of Management Ahmedabad)

  • Kanish Debnath

    (FLAME University)

Abstract

This chapter examines futures market efficiency in price discovery and dissemination. Given the backdrop of interventions of development organizations and Farmer Producer Companies as aggregators in the forward/futures market, the chapter examines the futures market efficiency in price discovery and price dissemination applying Johansen’s co-integration test and error correction model, especially in cumin, castor, wheat, rapeseed-mustard, guar seed, cotton, and coriander futures contracts traded on the NCDEX futures platform for considerable period. The contracts are not identical in their frequency/period of contract and have different contract specifications such as trading unit, delivery unit, order size, margin, delivery logic, quality parameters, price limit, and position limit, among others. The chapter reports that except wheat futures contracts, other commodities have not had any suspension in the trading since the contracts started. Before testing for the futures market efficiency, the liquidity and bid–ask spread analysis has been done for agricultural futures contracts. A few futures contracts that may be meaningful for farmer participation are selected and their efficiency in price formation is tested. Findings indicate an important role of select futures in price discovery and suggest that farmers can use futures prices of these to form their spot price expectation even if the direct participation is not feasible. An exception is coriander futures contract where irregular delivery due to operational problems and an unstable large correction in coriander futures and spot price (basis) which raised concerns about the long-run equilibrium price relationship. Furthermore, wheat contracts show the liquidity with futures and spot price being co-integrated in the long run. Castor seed, cumin, and rapeseed-mustard futures appear to be efficient in price discovery and dissemination. Guar seed and cotton (raw) futures are not found efficient and contain considerable speculative intent in futures pricing. Farmers need to be cautious while participating in this markets. However, cottonseed oilcake futures are better and can be utilized for realizing a positive payoff using an effective trading strategy.

Suggested Citation

  • Kushankur Dey & Vasant P. Gandhi & Kanish Debnath, 2021. "Futures Market Efficiency in Price Discovery and Dissemination," SpringerBriefs in Economics, in: Farmers’ Participation in India’s Futures Markets, chapter 0, pages 33-50, Springer.
    • Handle: RePEc:spr:spbchp:978-981-16-3432-1_4
    DOI: 10.1007/978-981-16-3432-1_4
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