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Price discovery and convergence in the Indian commodities market

Author

Listed:
  • Vishwanathan Iyer
  • Archana Pillai

Abstract

Purpose - 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

Suggested Citation

  • Vishwanathan Iyer & Archana Pillai, 2010. "Price discovery and convergence in the Indian commodities market," Indian Growth and Development Review, Emerald Group Publishing, vol. 3(1), pages 53-61, April.
  • Handle: RePEc:eme:igdrpp:v:3:y:2010:i:1:p:53-61
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    Citations

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    Cited by:

    1. repec:rss:jnljfe:v4i3p3 is not listed on IDEAS
    2. repec:rej:journl:v:16:y:2013:i:47:p:211-228 is not listed on IDEAS
    3. Joseph, Anto & Sisodia, Garima & Tiwari, Aviral Kumar, 2014. "A frequency domain causality investigation between futures and spot prices of Indian commodity markets," Economic Modelling, Elsevier, vol. 40(C), pages 250-258.
    4. repec:ebl:ecbull:eb-17-00592 is not listed on IDEAS
    5. 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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