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Price, Return and Volatility Linkages of Base Metal Futures traded in India

Author

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  • Sinha, Pankaj
  • Mathur, Kritika

Abstract

In this study the price, return and volatility behaviour of base metals (aluminium, copper, nickel, lead and zinc) which are traded on Indian commodity exchange - Multi Commodity Exchange (MCX) and International commodity exchange – London Metal Exchange (LME) are analysed. The time period chosen for the study is from November 1st, 2006 to January 30th, 2013. The paper attempts to demonstrate the linkages in price, return and volatility across the two markets for the five metals through three models - (a) Price – Co-integration methodology and Error Correction Mechanism Model (b) Return and Volatility – Modified GARCH model (c) Return and Volatility - ARMA-GARCH in mean model – Innovations Model. The findings of the paper suggest that there exists a strong linkage across the price, return and volatility of futures contracts traded on MCX and LME respectively. Given the level of linkages, the imposition of Commodity Transaction Taxes on sellers at the time of trading of these five base metals on Indian Commodity exchanges would lead to a fall in their trading volume as traders and speculators would escape the higher transaction cost of hedging by investing in International Exchanges instead of Indian Commodity exchanges. This movement from Indian to the International markets would defy the intention of imposition of the tax, as the government expects to earn revenue from the tax, and this would also defeat the very purpose of price discovery in the commodity exchanges in India.

Suggested Citation

  • Sinha, Pankaj & Mathur, Kritika, 2013. "Price, Return and Volatility Linkages of Base Metal Futures traded in India," MPRA Paper 47864, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:47864
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    File URL: https://mpra.ub.uni-muenchen.de/47864/1/MPRA_paper_47864.pdf
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    References listed on IDEAS

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    1. Xindan Li & Bing Zhang, 2009. "Price discovery for copper futures in informationally linked markets," Applied Economics Letters, Taylor & Francis Journals, vol. 16(15), pages 1555-1558.
    2. Xu, Xiaoqing Eleanor & Fung, Hung-Gay, 2005. "Cross-market linkages between U.S. and Japanese precious metals futures trading," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 15(2), pages 107-124, April.
    3. Donald Lien & Li Yang, 2009. "Intraday return and volatility spill-over across international copper futures markets," International Journal of Managerial Finance, Emerald Group Publishing, vol. 5(1), pages 135-149, February.
    4. Baur, Dirk & Jung, Robert C., 2006. "Return and volatility linkages between the US and the German stock market," Journal of International Money and Finance, Elsevier, vol. 25(4), pages 598-613, June.
    5. Aruga, Kentaka & Managi, Shunsuke, 2011. "Testing the international linkage in the platinum-group metal futures markets," Resources Policy, Elsevier, vol. 36(4), pages 339-345.
    6. Liyan Han & Rong Liang & Ke Tang, 2013. "Cross-market soybean futures price discovery: does the Dalian Commodity Exchange affect the Chicago Board of Trade?," Quantitative Finance, Taylor & Francis Journals, vol. 13(4), pages 613-626, March.
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    Cited by:

    1. Etoundi Atenga, Eric Martial, 2014. "Asymmetric shocks, persistence in volatility and spillover effects between non ferrous metals on the LME spot market," MPRA Paper 61017, University Library of Munich, Germany.

    More about this item

    Keywords

    Futures; Commodity Transaction Tax; GARCH; Base Metals;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G19 - Financial Economics - - General Financial Markets - - - Other
    • L61 - Industrial Organization - - Industry Studies: Manufacturing - - - Metals and Metal Products; Cement; Glass; Ceramics
    • Q02 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - Commodity Market

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