Authors: Sarveshwar Kumar Inani
Addresses: Indian Institute of Management, Lucknow, Uttar Pradesh, 226013, India
Abstract: The purpose of this study is to quantify the price discovery relationship between spot and futures prices of four Indian commodity indices, namely, combined commodity index, metal index, energy index, and agriculture index by employing common factor models. The sample consists of daily closing prices for the period from Oct 21, 2005 to May 29, 2015. Vector error correction model is estimated after conventional stationarity and cointegration tests. Spot and futures prices of all indices are found to be cointegrated except agriculture index which is therefore dropped for price discovery analysis. Results suggest that price discovery takes place in spot market for combined commodity index and metal index, whereas for energy index, price discovery occurs in futures market. This study will help market participants to draw a conclusion about relative efficiency of spot and futures market. This is the first study, to best of knowledge, which is using common factor models to analyse price discovery process in Indian commodity indices.
Keywords: component share; information share; Johansen cointegration; market efficiency; modified information share; MIS; price discovery; vector error correction model; VECM; India; commodity markets; spot prices; futures prices; combined commodity index; metal index; energy index; agriculture index.
International Journal of Business and Emerging Markets, 2016 Vol.8 No.4, pp.361 - 382
Available online: 01 Oct 2016 *Full-text access for editors Access for subscribers Purchase this article Comment on this article