Price Discovery and Efficiency of Indian Agricultural Commodity Futures Market: An Empirical Investigation

Sarveshwar Kumar Inani ()
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Sarveshwar Kumar Inani: Indian Institute of Management (IIM)

Journal of Quantitative Economics, 2018, vol. 16, issue 1, No 7, 129-154

Abstract: Abstract This study examines the price discovery process and relative efficiency of ten most liquid agricultural commodities’ futures contracts, traded on the largest agricultural commodity exchange of India (National Commodity and Derivative Exchange Limited). Three different common factor methodologies—component share method (Gonzalo and Granger in J Bus Econ Stat 13:27–35, 1995), information share method (Hasbrouck in J Financ 50:1175–1199, 1995), and modified information share method (Lien and Shrestha in J Futures Mark 29:377–395, 2009)—have been employed to determine the extent of price discovery contribution by spot and futures markets. The sample consists of daily data for the period from January 1, 2009 to October 20, 2015. Stationarity and Cointegration test results reveal that spot and futures prices are integrated and cointegrated for all commodities. The price discovery results show that the futures market leads the spot market in case of six commodities, i.e., castor seed, coriander, cottonseed oilcake, soy oil, sugarM and turmeric. Whereas, in the case of four commodities (chana (chickpea), guar seed, jeera, and mustard seed), price discovery takes place in the spot market. Therefore, it could be inferred that futures market is more efficient in price discovery of agricultural commodities. Policymakers could use these results to design futures contracts on other commodities or to plan concrete policies to curb speculation without hampering the efficiency of the agricultural commodity derivatives market.

Keywords: Price discovery; Agricultural commodities; Lead-lag relationship; Information share; Market efficiency; Futures market (search for similar items in EconPapers)
JEL-codes: G10 G13 G14 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (4)

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DOI: 10.1007/s40953-017-0074-7

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