The impact of investors in agricultural commodity derivative markets (original) (raw)
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Journal of Banking Financial Services …, 2011
On 7 May, 2008, the Indian Government announced the ban futures trading in four agricultural Commoditieschickpea, potato, rubber and soy oil. In the months that followed, whether or not futures trading contributed to the increase in prices was a hotly debated subject. Some claimed that futures markets benefit the farmers and don't contribute to price rises, while others argued that speculation had led to price distortion. The purpose of this paper is to examine the rationale behind the ban and to study whether there is significant impact of commodity future trading on volatility of commodity spot prices or there is no such impact. The data for this purpose is taken from Commodity exchange i.e. NCDEX for four quarters and three commodities i.e. sugar, channa and turmeric are selected for the study. The data is collected with respect to traded volume, traded value and trade price. Various statistical tools like correlation, Regression, Granger Causality test is applied to the data collected. Garch model basically designed to study the volatility is also used in the study. Reliability analysis is done so as to ensure that the data used in the study is reliable. The results exhibited that out of three commodities we have two cases where causality runs from volume to spot prices. In the rest one commodity there is no causality from volume to spot prices. Further we do not have sufficient evidence to support that future markets leads to higher inflation.
Index Trading and Agricultural Commodity Prices: A Panel Granger Causality Analysis
SSRN Electronic Journal, 2012
Our causality tests are applied to the relationship between index-based positions and futures prices on weekly data for twelve grain, livestock and other soft commodity markets (cocoa, coffee, corn, cotton, feeder cattle, live cattle, lean hogs, soybeans, soybean oil, sugar, wheat-CBOT and wheat-KCBT) over the period 2006-2010. Our results confirm the absence of direct effect between index-based trading and commodity prices.
New Evidence on the Impact of Index Funds in U.S. Grain Futures Markets
Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, 2011
Commodity index trader position data are examined for the years prior to the 2007-08 commodity price increase. New data from 2004 to 2005 show that a large increase in commodity index positions occurred in select grain futures markets. However, the increased index participation took place well in advance of the 2007-08 boom in prices. Granger causality tests fail to find any causal link between commodity index activity and grain futures prices. Furthermore, there is little evidence of an index-induced price bubble using long-horizon regressions. Nous avons analysé les données sur les positions des opérateurs de marché au cours des années qui ont précédé la hausse des prix des denrées en 2007-08. Selon de nouvelles données pour la période 2004-05, une hausse substantielle des positions liéesà l'indice des denrées est survenue sur des marchés de grainà terme sélectionnés. Toutefois, cette hausse des positions est survenue bien avant la montrée en flèche des cours en 2007-08. Le test de causalité de Granger n'a pas permis d'établir l'existence d'un lien de causalité entre l'activité liéeà l'indice des denrées et les coursà terme des grains. De plus, les régressions pour processusà mémoire longue ne permettent pas de conclureà l'existence d'une bulle des prix induite par l'indice.
Price Discovery, Transmission and Volatility: Evidence from Agricultural Commodity Futures §
This paper has examined the efficiency of futures trading in wheat, chickpea, maize and barley in terms of price transmission, price discovery and extent of volatility in prices. Wheat and barley have exhibited phenomenal growth coupled with high instability in futures trade quantity and value. Except for barley, futures and spot market prices have been found integrated. However, the level of integration, in terms of price transmission and long-run equilibrium, was most prominent in maize, followed by wheat and chickpea. Price discovery, one of the major benefits of futures trading, and the dominance of futures market in the process of price discovery have been clearly established. The study has indicated that futures are more efficient in price discovery of wheat and maize. Analysis of price volatility has revealed its persistence in spot prices though none of the selected commodities has exhibited an 'explosive' pattern. Further, the study has identified that farmers are not able to participate in the futures market owing to the small-scale production system prevailing in India.
Futures Trading and Spot Market Volatility: Evidence from Indian Commodity Markets
Asian Journal of Finance & Accounting, 2012
In the context of emerging Indian commodity futures markets, this paper empirically examines the effect of futures trading activity (trading volume ; proxy of futures liquidity) on spot price volatility for seven agricultural commodities (guar seeds, turmeric, soya bean, black pepper, barley, Maize and Castor Seed).We decompose the futures volume into expected and unexpected components using Hodrick-Prescott filter (HP filter) .To clearly understand the destabilization effect, the relationship of the unexpected liquidity of futures market is done with Unexpected volatility of spot market returns which is estimated by taking the residuals of the GARCH model. We find that unexpected futures trading volume is Granger causing spot price volatility and are significant for five out of seven agricultural commodities (Guarseed, Turmeric, Soybean, Maize and Castor Seed), consistent with Bessembinder and Seguin (1992).We find reversed effect for one commodity i.e. Pepper the effect of spot volatility on futures trading and for Barley no causality is revealed either from
Agricultural Commodity Trading: Is it Destabilizing Spot Markets?
Vikalpa: The Journal for Decision Makers
Executive Summary The future trading has been held responsible by certain political and interest groups of enhancing speculative trading activities and causing volatility in the spot market, thereby further spiralling up inflation. This study examines the effect of future of trading activity on spot market volatility. The study first determined the Granger causal relationship between unexpected future trading volume and spot market volatility. It then examined the Granger causal relationship between unexpected open interest and spot market volatility. The spot volatility and liquidity was modelled using EGARCH and unexpected trading volume. The expected trading volume and open interest was calculated by using the 21-day moving average, and the difference between actual and expected component was treated as the unexpected trading volume and unexpected open interest. Empirical results confirm that for chickpeas ( channa), cluster bean ( guar seed), pepper, refined soy oil, and wheat, ...
The Role of Index Trading in Price Formation in the Grains and Oilseeds Markets
Journal of Agricultural Economics, 2014
We use both Granger-causality and instrumental variables (IV) methods to examine the impact of index fund positions on price returns for the main U.S. grains and oilseed futures markets. Our analysis supports earlier conclusions that Granger-causal impacts are generally not discernible. However, market microstructure theory suggests trading impacts should be instantaneous. IV-based tests for contemporaneous causality provide stronger evidence of price impact. We find even stronger evidence that changes in index positions can help predict future changes in aggregate commodity price indices. This result suggests that changes in index investment are in part driven by information which predicts commodity price changes over the coming months.
PRICE VOLATILITY OF AGRICULTURAL PRODUCTS IN FUTURES TRADING IN INDIA – A STATISTICAL ANALYSIS
Agriculture is the backbone of India with a sizeable population depend on it for employment and livelihood. Therefore, the effective functioning of markets of agricultural produce is important for cultivators, other producers, policy makers, etc. The markets are expected to realize a fair price for farmers, traders, which are often a serious issue due to seasonality, lack of storage facilities, yield differences across different geographical regions in our country. The abundance during harvest season, with damped price and differences in yield and quality, frequent government interference with administered prices on select commodities is resulting in a complex marketing environment for agricultural produce. This environment throws the farmers and traders to price uncertainty at every harvest season. Against this background, an attempt is made in this paper to provide a description on Indian commodities markets with a brief profile of agriculture commodities selected for detailed study is presented. Further, it also analysed the price volatility during the period of study. Finally, it came with suggestions for the providing a fair price for the agricultural products to the cultivators by way of regulating these futures markets.