IDEAS home Printed from https://ideas.repec.org/a/sae/vikjou/v43y2018i1p47-57.html
   My bibliography  Save this article

Agricultural Commodity Trading: Is it Destabilizing Spot Markets?

Author

Listed:
  • C. P. Gupta
  • Sanjay Sehgal
  • Sahaj Wadhwa

Abstract

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 future (unexpected) liquidity leads spot market volatility. The causal relationship implies that trading volume, which is a proxy for speculators and day traders, is dominant in the future market and leads volatility in the spot market. The results are in conformity with earlier empirical findings — Yang, Balyeat and Leathan (2005) and Nath and Lingareddy (2008) —that future trading destabilizes the spot market for agricultural commodities. Results show that there is no causal relationship between future open interest and spot volatility for all commodities except refined soy oil and wheat. The findings imply that open interest, which is a proxy of hedging activity, is leading to volatility in spot market for refined soy oil and wheat. The results are in conformity to earlier empirical studies that there is a weak causal feedback between future unexpected open interest and volatility in spot market ( Yang et al., 2005 ). For chickpeas (channa), the increase in volatility in the spot market increases trading activity in the future market. The findings are contrary to earlier empirical evidence ( Chatrath, Ramchander, & Song, 1996 ; Yang et al., 2005 ) that increase in spot volatility reduces future trading activity. However, they are in conformity to Chen, Cuny and Haugen (1995) that increase in spot volatility increases future open interest. The results reveal that the future market has been unable to engage sufficient hedging activity. Thereby, a causal relationship exists only for future trading volume and spot volatility, and not for future open interest and spot volatility. The results have major implications for policymakers, investment managers, and for researchers as well. The study contributes to literature on price discovery, spillovers, and price destabilization for Indian commodity markets.

Suggested Citation

  • C. P. Gupta & Sanjay Sehgal & Sahaj Wadhwa, 2018. "Agricultural Commodity Trading: Is it Destabilizing Spot Markets?," Vikalpa: The Journal for Decision Makers, , vol. 43(1), pages 47-57, March.
  • Handle: RePEc:sae:vikjou:v:43:y:2018:i:1:p:47-57
    DOI: 10.1177/0256090917750263
    as

    Download full text from publisher

    File URL: https://journals.sagepub.com/doi/10.1177/0256090917750263
    Download Restriction: no

    File URL: https://libkey.io/10.1177/0256090917750263?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Jian Yang & R. Brian Balyeat & David J. Leatham, 2005. "Futures Trading Activity and Commodity Cash Price Volatility," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 32(1‐2), pages 297-323, January.
    2. 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(1), pages 21-39, March.
    3. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
    4. Booth, G. Geoffrey & Martikainen, Teppo & Tse, Yiuman, 1997. "Price and volatility spillovers in Scandinavian stock markets," Journal of Banking & Finance, Elsevier, vol. 21(6), pages 811-823, June.
    5. Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, vol. 37(3), pages 424-438, July.
    6. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-1335, November.
    7. Arjun Chatrath & Sanjay Ramchander & Frank Song, 1996. "The role of futures trading activity in exchange rate volatility," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 16(5), pages 561-584, August.
    8. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, vol. 59(2), pages 347-370, March.
    9. Yang, Jian & Leatham, David J., 1999. "Price Discovery in Wheat Futures Markets," Journal of Agricultural and Applied Economics, Cambridge University Press, vol. 31(2), pages 359-370, August.
    10. Figlewski, Stephen, 1981. "Futures Trading and Volatility in the GNMA Market," Journal of Finance, American Finance Association, vol. 36(2), pages 445-456, May.
    11. Sanjay Sehgal & Namita Rajput & Florent Deisting, 2013. "Price Discovery and Volatility Spillover: Evidence from Indian Commodity Markets," The International Journal of Business and Finance Research, The Institute for Business and Finance Research, vol. 7(3), pages 57-75.
    12. Chen, Nai-Fu & Cuny, Charles J & Haugen, Robert A, 1995. "Stock Volatility and the Levels of the Basis and Open Interest in Future Contracts," Journal of Finance, American Finance Association, vol. 50(1), pages 281-300, March.
    13. Bhargava, Vivek & Malhotra, D.K., 2007. "The relationship between futures trading activity and exchange rate volatility, revisited," Journal of Multinational Financial Management, Elsevier, vol. 17(2), pages 95-111, April.
    14. Gamini Premaratne & Lakshmi Bala, 2004. "Stock Market Volatility: Examining North America, Europe and Asia," Econometric Society 2004 Far Eastern Meetings 479, Econometric Society.
    15. Kasman, Adnan & Kasman, Saadet, 2008. "The impact of futures trading on volatility of the underlying asset in the Turkish stock market," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 387(12), pages 2837-2845.
    16. Param Silvapulle & Imad A. Moosa, 1999. "The relationship between spot and futures prices: Evidence from the crude oil market," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 19(2), pages 175-193, April.
    17. Bessembinder, Hendrik & Seguin, Paul J, 1992. "Futures-Trading Activity and Stock Price Volatility," Journal of Finance, American Finance Association, vol. 47(5), pages 2015-2034, December.
    18. Hsieh, David A., 1993. "Implications of Nonlinear Dynamics for Financial Risk Management," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 28(1), pages 41-64, March.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Meenakshi Malhotra & Dinesh Kumar Sharma, 2016. "Volatility Dynamics in Oil and Oilseeds Spot and Futures Market in India," Vikalpa: The Journal for Decision Makers, , vol. 41(2), pages 132-148, June.
    2. Jian Yang & R. Brian Balyeat & David J. Leatham, 2005. "Futures Trading Activity and Commodity Cash Price Volatility," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 32(1‐2), pages 297-323, January.
    3. Claudeci Da Silva & Hugo Agudelo Murillo & Joaquim Miguel Couto, 2014. "Early Warning Systems: Análise De Ummodelo Probit De Contágio De Crise Dos Estados Unidos Para O Brasil(2000-2010)," Anais do XL Encontro Nacional de Economia [Proceedings of the 40th Brazilian Economics Meeting] 110, ANPEC - Associação Nacional dos Centros de Pós-Graduação em Economia [Brazilian Association of Graduate Programs in Economics].
    4. Ashish Kumar, 2015. "Impact of Currency Futures on Volatility in Exchange Rate," Paradigm, , vol. 19(1), pages 95-108, June.
    5. Ming-Hsien Chen & Vivian Tai, 2014. "The price discovery of day trading activities in futures market," Review of Derivatives Research, Springer, vol. 17(2), pages 217-239, July.
    6. Martin T. Bohl & Pierre L. Siklos & Claudia Wellenreuther, 2018. "Speculative activity and returns volatility of Chinese major agricultural commodity futures," CAMA Working Papers 2018-06, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    7. Bohl, Martin T. & Diesteldorf, Jeanne & Siklos, Pierre L., 2015. "The effect of index futures trading on volatility: Three markets for Chinese stocks," China Economic Review, Elsevier, vol. 34(C), pages 207-224.
    8. Alizadeh, Amir H., 2013. "Trading volume and volatility in the shipping forward freight market," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 49(1), pages 250-265.
    9. Bhargava, Vivek & Malhotra, D.K., 2007. "The relationship between futures trading activity and exchange rate volatility, revisited," Journal of Multinational Financial Management, Elsevier, vol. 17(2), pages 95-111, April.
    10. Bohl, Martin T. & Siklos, Pierre L. & Wellenreuther, Claudia, 2018. "Speculative activity and returns volatility of Chinese agricultural commodity futures," Journal of Asian Economics, Elsevier, vol. 54(C), pages 69-91.
    11. Stéphane Yen & Ming-Hsiang Chen, 2010. "Open interest, volume, and volatility: evidence from Taiwan futures markets," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 34(2), pages 113-141, April.
    12. Alizadeh, Amir H. & Tamvakis, Michael, 2016. "Market conditions, trader types and price–volume relation in energy futures markets," Energy Economics, Elsevier, vol. 56(C), pages 134-149.
    13. Sila Alan, Nazli & Karagozoglu, Ahmet K. & Korkmaz, Sibel, 2016. "Growing pains: The evolution of new stock index futures in emerging markets," Research in International Business and Finance, Elsevier, vol. 37(C), pages 1-16.
    14. Ren Zhang & Arnold Polanski, 2016. "Volatility–volume co-movements: evidence from China metal markets," Applied Economics, Taylor & Francis Journals, vol. 48(45), pages 4312-4336, September.
    15. Hong, Yongmiao, 2001. "A test for volatility spillover with application to exchange rates," Journal of Econometrics, Elsevier, vol. 103(1-2), pages 183-224, July.
    16. Fung, Hung-Gay & Patterson, Gary A., 1999. "The dynamic relationship of volatility, volume, and market depth in currency futures markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 9(1), pages 33-59, January.
    17. Martin T. Bohl & Martin Stefan, 2020. "Return dynamics during periods of high speculation in a thinly traded commodity market," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 40(1), pages 145-159, January.
    18. John M. Fry & Baoying Lai & Mark Rhodes, 2011. "The interdependence of Coffee spot and futures market," Working Papers 2011.1, International Network for Economic Research - INFER.
    19. Murinde V. & Poshakwala S., 2001. "Volatility in the Emerging Stock Markets in Central and Eastern Europe: Evidence on Croatia, Czech Republic, Hungary, Poland, Russia and Slovakia," European Research Studies Journal, European Research Studies Journal, vol. 0(3-4), pages 73-102, July - De.
    20. Petropoulos, Fotios & Apiletti, Daniele & Assimakopoulos, Vassilios & Babai, Mohamed Zied & Barrow, Devon K. & Ben Taieb, Souhaib & Bergmeir, Christoph & Bessa, Ricardo J. & Bijak, Jakub & Boylan, Joh, 2022. "Forecasting: theory and practice," International Journal of Forecasting, Elsevier, vol. 38(3), pages 705-871.
      • Fotios Petropoulos & Daniele Apiletti & Vassilios Assimakopoulos & Mohamed Zied Babai & Devon K. Barrow & Souhaib Ben Taieb & Christoph Bergmeir & Ricardo J. Bessa & Jakub Bijak & John E. Boylan & Jet, 2020. "Forecasting: theory and practice," Papers 2012.03854, arXiv.org, revised Jan 2022.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:sae:vikjou:v:43:y:2018:i:1:p:47-57. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: SAGE Publications (email available below). General contact details of provider: .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.