Price discovery and convergence in the Indian commodities market
AbstractPurpose – The purpose of this paper is to examine whether futures markets play a dominant role in the price discovery process. The rate of convergence of information from one market to another is analyzed to infer the efficiency of futures as an effective hedging tool. Design/methodology/approach – The paper uses a two-regime threshold vector autoregression (TVAR) and a two-regime threshold autoregression for six commodities. The regimes (or states) are defined around the expiration week of the futures contract. Findings – This paper finds evidence for price discovery process happening in the futures market in five out of six commodities. However, the rate of convergence of information is slow, particularly in the non-expiration weeks. For copper, gold and silver, the rate of convergence is almost instantaneous during the expiration week of the futures contract affirming the utility of futures contracts as an effective hedging tool. In case of chickpeas, nickel and rubber the convergence worsens during the expiration week indicating the non-usability of futures contract for hedging. Originality/value – This paper extends the framework developed by Garbade et al. by superimposing a two-regime TVAR model to quantify the price discovery process. It is the first paper to analyze the differential impact of price discovery and convergence during expiration week (compared to non-expiration weeks) for the Indian commodities market.
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Bibliographic InfoArticle provided by Emerald Group Publishing in its journal Indian Growth and Development Review.
Volume (Year): 3 (2010)
Issue (Month): 1 ( April)
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- Tarun Soni, 2013. "Testing Efficiency of Guar seed Futures: Empirical Evidence from India," Romanian Economic Journal, Department of International Business and Economics from the Academy of Economic Studies Bucharest, vol. 16(47), pages 211-228, March.
- P., Srinivasan, 2011. "Price Discovery and Volatility Spillovers in Indian Spot-Futures Commodity Market," MPRA Paper 47412, University Library of Munich, Germany.
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