Regulations and price discovery: oil spot and futures markets

Ashima Goyal and Shruti Tripathi ()
Additional contact information
Shruti Tripathi: Indira Gandhi Institute of Development Research

Indira Gandhi Institute of Development Research, Mumbai Working Papers from Indira Gandhi Institute of Development Research, Mumbai, India

Abstract: In a period of great oil price volatility, the paper assesses the role of expected net demand compared to liquidity and leverage driven expansion in net long positions. We apply time series tests for mutual and across exchange causality, and lead-lag relationships, between crude oil spot and futures prices on two international and one Indian commodity exchange. We also search for short duration bubbles, and how they differ across exchanges. The results show expectations mediated through financial markets did not lead to persistent deviations from fundamentals. There is mutual Granger causality between spot and futures, and in the error correction model for mature exchanges, spot leads futures. Mature market exchanges lead in price discovery. Futures in these markets lead Indian (daily) futures-markets are integrated. But there is stronger evidence of short-term or collapsing bubbles in mature market futures compared to Indian, although mature markets have a higher share of hedging. Indian regulations such as position limits may have mitigated short duration bubbles. It follows leverage due to lax regulation may be responsible for excess volatility. Well-designed regulations can improve market functioning.

Keywords: crude oil spot, futures; commodity exchanges; short duration bubbles; position limits (search for similar items in EconPapers)
JEL-codes: C32 E44 G13 G15 G18 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2012-03
New Economics Papers: this item is included in nep-cwa, nep-ene and nep-mst
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
http://www.igidr.ac.in/pdf/publication/WP-2012-016.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ind:igiwpp:2012-016

Access Statistics for this paper

More papers in Indira Gandhi Institute of Development Research, Mumbai Working Papers from Indira Gandhi Institute of Development Research, Mumbai, India Contact information at EDIRC.
Bibliographic data for series maintained by Shamprasad M. Pujar ().