ROLE OF COMMODITY FUTURES ON INDIAN AGRICULTURAL COMMODITY MARKET (original) (raw)
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Impact of Futures Trading on Agricultural Commodity Futures Market in India
On agricultural commodity futures, there is always been a doubt, expressed by different bodies and experts on the usefulness and suitability of futures contract in developing in underlying agricultural commodity market, especially in agricultural based economy like India. Here an attempt is made to revalidate the impact of futures trading on agricultural commodity market. The daily price information in spot and futures market for a period of seven years ranging from 2007 to 14 for five major agricultural commodities are VAR (Vector Auto Regression) and GARCH (1,1) to test the dynamic interrelationship among the variables. The empirical findings significantly shows that comparative advantage of futures market in disseminating information, leading to a significant price discovery and risk management, that can help to successfully develop the underlying commodity market in India.
The concept of commodity market is not new in India. The history of commodity market in India dates back to the ancient times, but the first organized market was established in 1875. However commodity market in India remained in a state of hibernation for four decades, which was market by suspicion on the benefits of futures trading. A Commodity Market has gained momentum since, its introduction in India and has played a major role in Indian financial markets. More importantly, Commodity Market is one of the important tools of hedging risk. A Commodity market broadly is an Agriculture market whose payoff structure is determined by the value of underlying commodities, exchange rate, oil price, and the like. So a Commodity market comprises of trade instruments which derive their value from some underlying variable assets like food grains such as wheat, rice pulses etc. All commodity markets are based on some " cash " products. Though the agricultural sector contributes significantly to the Indian economy, it faces several bottlenecks, one of those being the antiquated laws governing agricultural marketing and price discovery, leading to low price realization by Indian farmers. In India, six national level exchanges offer commodity derivatives contracts on commodities, with some having electronic spot commodity exchanges to facilitate spot trading of commodities. The present study is analysis into agricultural and non-agricultural commodities in Indian commodity markets.
Agricultural Commodity Futures in India: Some Empirical Observation
The paper is a humble attempt to address the issues related to agricultural commodity futures market in India. An empirical analysis is carried out in terms of 10(ten) agricultural commodity futures (Chana, Jute, Kapas, Pepper, Wheat, Rice, Potato, Yellow peas, Sugar and Urad) for the period 2004-2012. The study reveals that in an environment of persistent inflation in the economy coupled with global recession, agricultural commodity futures market is not a favourite destination for the investors to put in their savings.
Is Futures Market Mitigating Price Risk: An Exploration of Wheat and Maize Market
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Instability of commodity prices has always been a major concern of the producers as well as the consumers in an agriculture-dominated country like India. Farmers in a bid to avert the price risk often tend to go for distress sale and thereby reduce the potential returns. In order to cope up with this problem, futures trading has emerged as a viable option for providing a greater degree of assurance on the price front. Thus, futures markets serve as a risk -shifting function. In the present study, an attempt has been made to look into the mechanism of movement of spot and futures prices for two important food crops in Indian agriculture. The Augmented Dickey Fuller (ADF) test has been used for both the crops to check the stationarity of the time series data. Most of the series have been observed to follow the stationary pattern at the first difference. The cointegration test has been attempted to find out whether there exists a longrun relationship between spot and futures prices of various contract months for maize and wheat crops. However, there exists a short run disequilibrium between these two. It has been observed that the futures contract behave in an expected manner and there exists a mechanism for long-run equilibrium in the maize as well as wheat crops. This phenomenon of price convergence for both maize and wheat crops clearly states that the farmers are mitigating price risk as spot prices and future prices converges.
AGRICULTURAL COMMODITY FUTURES IN INDIA-A LITERATURE REVIEW
The purpose of this paper is to provide an overview of Agricultural Commodity Futures in India by taking into account the variability of empirical results of some selected studies on agricultural commodity futures. This paper is based on review of empirical results of studies on agricultural commodity futures for the 2001-2013 periods. These studies have been classified in three sections: Growth and performance of the commodity futures market, relationship between agricultural commodity futures market and spot market and price risk management through agricultural commodity futures. The paper shows the growth in commodity futures market along with identification of problems that are affecting the performance of agricultural commodity futures in India.
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In this study an attempt has been made to study the price discovery relationship for 3 of the top traded agricultural commodities on NCDEX namely Soyabean, Castorseed and Chana. The necessary daily data on spot and futures market prices are collected from the NCDEX website for the period 1 st January, 2009 to 31 st March, 2014. The near month contract of the futures markets of respective commodity was considered for the study, as they are mostly heavily traded as compared to next month and far month futures contracts. Augmented Dickey Fuller test was employed to test stationary of the data series. Besides, Johansen cointegration test was employed to access the long-run relationship between the variables and Vector Error Correction Mechanism (VECM) was employed to examine the short run dynamics. The cointegration results confirm the existence of long-run relationship between spot and futures series of Castor seed, Channa and Soya bean, respectively. The vector error correction model ...
A STUDY ON THE PERFORMANCE OF COMMODITY FUTURES IN INDIA
India is among the top producers of a number of commodities and has a long history of trading in commodity derivatives. Futures, as a derivative tool of risk management have existed in India. Major industries of its economy like sugar, textile, metal, energy etc. are based on various commodities. Today, India enjoys world ranking with respect to trading volume in certain commodities like Silver, Gold, Copper, Guar Seed etc. So, far the financial returns are concerned commodity futures markets allow commercial producers and commercial consumers to offset the risk of adverse future price movements in the commodities that they are selling or buying besides the price discovery tool. So considering these points, an attempt has been made to study the performance of commodity futures trading in India.
2015
In an agriculture-dominated economy like India, farmers face not only yield risk but also price risk as the Government has reduced its direct market intervention to encourage private participation based on market forces. This has led to increased exposure of agricultural produce to price and other market risks. Commodity futures and derivatives have a vital role to play in the price risk management process, especially in agriculture. Keeping this into consideration, the present paper analyzes the efficiency of agricultural commodity markets by assessing the relationships between futures prices and spot market prices of three agricultural commodities i.e. cotton, turmeric and castor seed in India. The efficiency of the futures market for 3 agricultural commodities, traded at one of the largest commodity exchanges of India, i.e. National Commodity & Derivatives Exchange Ltd, has been explored by using OLS regression analysis and Granger causality tests. Augmented Dickey-Fuller test an...
The paper studies the Indian commodity futures market in order to determine the price discovery, long run market efficiency and short run dynamics in futures market using by time series analysis tools. To test the market efficiency and long run equilibrium, tools like Engle and Granger cointegration test (1987) and Johansen cointegration test (1988) have been applied. The Granger Causality (1969) test is used test the market efficiency to infer cause and affect relationship between spot and futures market in India. To examine efficiency of commodity futures and spot market the MCX's 1 four spot and futures commodity indices data are used. The paper observes that the role of commodity futures is very significant in price discovery, and improving efficiency of the market.
SSRN Electronic Journal, 2000
Purpose -The purpose of this paper is to study the market efficiency, unbiasedness and the direction of causality among four agricultural commodity futures contracts for a forecasting horizon of 28 days, 56 days and 84 days which are traded at National Commodity and Derivatives Exchange Ltd. Design/methodology/approach -To analyse the efficiency of futures market in Indian scenario, we focus on maize, chickpea, soybean and wheat which are among the most important agricultural commodities traded in India. In the first step, Augmented Dickey-Fuller test and nonparametric Phillips-Perron approaches have been used to examine the stationarity of all futures and spot price series. After testing the presence of cointegration in futures and spot series using Johansen's Cointegration approach, the joint restrictions of β 0 ¼ 0, β 1 ¼ 1 and β 1 ¼ 1 on the cointegrating vectors were imposed to test whether the futures price is an unbiased predictor of spot at contract maturity. In the next step, linear Toda and Yamamoto (1995) and the nonparametric Diks and Panchenko causality tests were applied to examine the direction of causality. Finally, nonlinear test were applied on the vector error correction model (VECM) residuals to investigate whether any remaining causality is strictly nonlinear in nature. Findings -The results of cointegration tests between futures and spot prices of the selected agricultural commodities indicated a long term relationship do exist in three out of four futures contracts. However, the Wald tests results on the cointegrating vectors indicate markets as inefficient and biased. Further, analysis of short-term relationship using alternate tests of causality do not give consistent results for same commodity series indicating that results may vary due to alternate measures and specifications. Finally, if we consider the results of Diks-Panchenko test on the filtered VECM-residuals, results provide evidence that if cointegration is taken into account; neither spot nor future leads or lags the other consistently.