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Samuelson Hypothesis & Indian Commodity Derivatives Market

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  • Saurabh Gupta

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  • Prabina Rajib

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    Abstract

    Samuelson ( 1965 ) devised that futures price volatility increases as the futures contract approaches its expiration. The relation amid the volatility and time to maturity has significant inference for hedging strategies. Interestingly, so far the empirical evidence in favor of the Samuelson Hypothesis (maturity effect) is mixed in various markets. Considering no significant work to examine the relationship is so far carried out in commodity derivative markets of India, this paper ordeal the Samuelson Hypothesis on 8 commodities traded on Multi-Commodity Exchange (MCX), India. We have examined the issue by applying different regression techniques to test the hypothesis for 8 commodities (Aluminium, Nickel, Copper, Gold, Silver, Natural Gas, Crude Oil and Wheat) using inter-day data on MCX India. In order to test the Samuelson’s hypothesis, tests have been conducted using a series of GARCH, EGARCH and TGARCH models by including trading volume, open interest and time-to-maturity in the conditional variance equation. From our results, it is concluded that Samuelson’s hypothesis does not hold true for majority of commodity contracts considered. Our results also find that volatility series depend on the trading volume, compared to the time-to-maturity or open interest. As Samuelson hypothesis does not hold true for majority of commodity contracts, traders in Indian commodity derivative markets should not bias their decisions solely based on the time-to-maturity, but should also consider trading volume and open interest as they are an important determinant of price volatility. They should also consider the possibility of leverage effect while predicting future price volatilities, and the associated margin requirements. Copyright Springer Science+Business Media, LLC. 2012

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    File URL: http://hdl.handle.net/10.1007/s10690-012-9152-1
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    Bibliographic Info

    Article provided by Springer in its journal Asia-Pacific Financial Markets.

    Volume (Year): 19 (2012)
    Issue (Month): 4 (November)
    Pages: 331-352

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    Handle: RePEc:kap:apfinm:v:19:y:2012:i:4:p:331-352

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    Web page: http://springerlink.metapress.com/link.asp?id=102851

    Related research

    Keywords: Samuelson hypothesis; Maturity effect; Volatility modeling; GARCH; Indian commodity derivatives;

    References

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    1. Daal, Elton & Farhat, Joseph & Wei, Peihwang P., 2006. "Does futures exhibit maturity effect? New evidence from an extensive set of US and foreign futures contracts," Review of Financial Economics, Elsevier, vol. 15(2), pages 113-128.
    2. Imad Moosa & Bernard Bollen, 2001. "Is there a maturity effect in the price of the S&P 500 futures contract?," Applied Economics Letters, Taylor & Francis Journals, vol. 8(11), pages 693-695.
    3. Duong, Huu Nhan & Kalev, Petko S., 2008. "The Samuelson hypothesis in futures markets: An analysis using intraday data," Journal of Banking & Finance, Elsevier, vol. 32(4), pages 489-500, April.
    4. W. David Walls, 1999. "Volatility, volume and maturity in electricity futures," Applied Financial Economics, Taylor & Francis Journals, vol. 9(3), pages 283-287.
    5. Verma, Ashutosh & Kumar, C.V.R.S. Vijaya, 2010. "An Examination of the Maturity Effect in the Indian Commodities Futures Market," Agricultural Economics Research Review, Agricultural Economics Research Association (India), vol. 23(2).
    6. Herbert, John H, 1995. "Trading volume, maturity and natural gas futures price volatility," Energy Economics, Elsevier, vol. 17(4), pages 293-299, October.
    7. Bessembinder, Hendrik & Seguin, Paul J., 1993. "Price Volatility, Trading Volume, and Market Depth: Evidence from Futures Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 28(01), pages 21-39, March.
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