Abstract
This study examines the price discovery process and relative efficiency of ten most liquid agricultural commodities’ futures contracts, traded on the largest agricultural commodity exchange of India (National Commodity and Derivative Exchange Limited). Three different common factor methodologies—component share method (Gonzalo and Granger in J Bus Econ Stat 13:27–35, 1995), information share method (Hasbrouck in J Financ 50:1175–1199, 1995), and modified information share method (Lien and Shrestha in J Futures Mark 29:377–395, 2009)—have been employed to determine the extent of price discovery contribution by spot and futures markets. The sample consists of daily data for the period from January 1, 2009 to October 20, 2015. Stationarity and Cointegration test results reveal that spot and futures prices are integrated and cointegrated for all commodities. The price discovery results show that the futures market leads the spot market in case of six commodities, i.e., castor seed, coriander, cottonseed oilcake, soy oil, sugarM and turmeric. Whereas, in the case of four commodities (chana (chickpea), guar seed, jeera, and mustard seed), price discovery takes place in the spot market. Therefore, it could be inferred that futures market is more efficient in price discovery of agricultural commodities. Policymakers could use these results to design futures contracts on other commodities or to plan concrete policies to curb speculation without hampering the efficiency of the agricultural commodity derivatives market.
![](http://media.springernature.com/m312/springer-static/image/art%3A10.1007%2Fs40953-017-0074-7/MediaObjects/40953_2017_74_Fig1_HTML.gif)
Similar content being viewed by others
Notes
Source: Economic Times, May 14, 2013 [accessed on December 15, 2016] (http://articles.economictimes.indiatimes.com/2013-05-14/news/39255969_1_guar-gum-guar-seed-additional-delivery-centres).
Source: Smart Investor (Business Standard), May 14, 2013 [accessed on December 15, 2016] (http://smartinvestor.business-standard.com/market/story-175974-storydet-After_14_months_of_ban_trading_in_guar_seed_guar_gum_begins.htm#.WF5-nlN97IU).
Source: Official website of NCDEX [accessed on December 15, 2016] (http://www.ncdex.com/GlobalSearch/Search.aspx?SearchText=CHARJDDEL&SearchTitle=CHANA).
Source: Economic Times, Oct 31, 2016 [accessed on December 20, 2016] (http://economictimes.indiatimes.com/markets/commodities/views/view-its-time-to-bring-back-the-widely-traded-chana-futures/articleshow/55149127.cms).
Source: Official website of SEBI [accessed on December 20, 2016] (http://www.sebi.gov.in/sebiweb/home/detail/34084/yes/PR-Trading-in-Chana-futures-on-Commodity-Derivative-Exchanges).
References
Ali, Jabir, and Kriti Bardhan Gupta. 2011. Efficiency in agricultural commodity futures markets in India: Evidence from cointegration and causality tests. Agricultural Finance Review 71: 162–178. doi:10.1108/00021461111152555.
Arora, Sunita, and Narender Kumar. 2013. Role of futures market in price discovery. Decision (0304-0941) 40: 165–179. doi:10.1007/s40622-013-0019-8.
Baillie, Richard T., G. Geoffrey Booth, Yiuman Tse, and Tatyana Zabotina. 2002. Price discovery and common factor models. Journal of Financial Markets 5: 309–321. doi:10.1016/S1386-4181(02)00027-7.
Brockman, Paul, and Yiuman Tse. 1995. Information shares in Canadian agricultural cash and futures markets. Applied Economics Letters 2: 335–338. doi:10.1080/758518983.
Dummu, Tata Rao. 2009. Commodity futures markets in India: its impact on production and prices. Indian Journal of Agricultural Economics 64: 333–356.
Easwaran, R.Salvadi, and P. Ramasundaram. 2008. Whether commodity futures market in agriculture is efficient in price discovery?—An econometric analysis. Agricultural Economics Research Review 21: 337–344.
Elumalai, K., N. Rangasamy, and R.K. Sharma. 2009. Price discovery in India’s agricultural commodity futures markets. Indian Journal of Agricultural Economics 64: 315–323.
Engle, Robert F., and Clive W.J. Granger. 1987. Co-integration and error correction: representation, estimation, and testing. Econometrica: journal of the Econometric Society 55: 251–276.
Figuerola-Ferretti, Isabel, and Jesús Gonzalo. 2010. Modelling and measuring price discovery in commodity markets. Journal of Econometrics 158. Twenty Years of Cointegration: 95–107. doi:10.1016/j.jeconom.2010.03.013.
Fricke, Christoph, and Lukas Menkhoff. 2011. Does the “Bund” dominate price discovery in Euro bond futures? Examining information shares. Journal of Banking & Finance 35: 1057–1072. doi:10.1016/j.jbankfin.2010.09.022.
Frijns, Bart, Aaron Gilbert, and Alireza Tourani-Rad. 2015. The determinants of price discovery: Evidence from US-Canadian cross-listed shares. Journal of Banking & Finance 59: 457–468. doi:10.1016/j.jbankfin.2015.07.011.
Frijns, Bart, Ivan Indriawan, and Alireza Tourani-Rad. 2015. Macroeconomic news announcements and price discovery: Evidence from Canadian-U.S. cross-listed firms. Journal of Empirical Finance 32: 35–48. doi:10.1016/j.jempfin.2014.05.001.
Garbade, Kenneth D., and William L. Silber. 1983. Price movements and price discovery in futures and cash markets. The Review of Economics and Statistics 65: 289–297. doi:10.2307/1924495.
Gonzalo, Jesus, and Clive Granger. 1995. Estimation of common long-memory components in cointegrated systems. Journal of Business & Economic Statistics 13: 27–35. doi:10.1080/07350015.1995.10524576.
Hasbrouck, Joel. 1995. One security, many markets: determining the contributions to price discovery. The Journal of Finance 50: 1175–1199. doi:10.1111/j.1540-6261.1995.tb04054.x.
Inoue, Takeshi, and Shigeyuki Hamori. 2014. Market efficiency of commodity futures in India. Applied Economics Letters 21: 522–527. doi:10.1080/13504851.2013.872751.
Iyer, Vishwanathan, and Archana Pillai. 2010. Price discovery and convergence in the Indian commodities market. Indian Growth and Development Review 3: 53–61. doi:10.1108/17538251011035873.
Joseph, Anto, K.G. Suresh, and Garima Sisodia. 2015. Is the causal nexus between agricultural commodity futures and spot prices asymmetric? Evidence from India. Theoretical Economics Letters 5: 285–295. doi:10.4236/tel.2015.52034.
Joseph, Anto, Garima Sisodia, and Aviral Kumar Tiwari. 2014. A frequency domain causality investigation between futures and spot prices of Indian commodity markets. Economic Modelling 40: 250–258. doi:10.1016/j.econmod.2014.04.019.
Kaufmann, Robert K., and Ben Ullman. 2009. Oil prices, speculation, and fundamentals: Interpreting causal relations among spot and futures prices. Energy Economics 31: 550–558. doi:10.1016/j.eneco.2009.01.013.
Kumar, Sunil. 2004. Price discovery and market efficiency: Evidence from agricultural commodities futures markets. South Asian Journal of Management 11: 32–47.
Lakshmi, P., S. Visalakshmi, and S. Padmavathy. 2015. Exploring the nexus between futures contracts and spot returns in the Indian commodity market. International Journal of Indian Culture and Business Management 10: 306–317. doi:10.1504/IJICBM.2015.068493.
Lien, Donald, and Keshab Shrestha. 2009. A new information share measure. Journal of Futures Markets 29: 377–395. doi:10.1002/fut.20356.
Malhotra, Meenakshi, and Dinesh Kumar Sharma. 2013. Efficiency of guar seed futures market in India: An empirical study. IUP Journal of Applied Finance 19: 45–63.
McKenzie, Andrew M., and Matthew T. Holt. 2002. Market efficiency in agricultural futures markets. Applied Economics 34: 1519–1532. doi:10.1080/00036840110102761.
Naik, Gopal, and Sudhir Kumar Jain. 2002. Indian agricultural commodity futures markets: A performance survey. Economic and Political Weekly 37: 3161–3173.
Pavabutr, Pantisa, and Piyamas Chaihetphon. 2010. Price discovery in the Indian gold futures market. Journal of Economics & Finance 34: 455–467. doi:10.1007/s12197-008-9068-9.
Peri, Massimo, Lucia Baldi, and Daniela Vandone. 2013. Price discovery in commodity markets. Applied Economics Letters 20: 397–403. doi:10.1080/13504851.2012.709590.
Sahadevan, K.G. 2002a. Price discovery, return and market conditions: Evidence from commodity futures markets. The ICFAI Journal of Applied Finance 8: 25–39.
Sahadevan, K.G. 2002b. Sagging agricultural commodity exchanges: Growth constraints and revival policy options. Economic and Political Weekly 37: 3153–3160.
Sehgal, Sanjay, and Dr. Namita Rajput, and Rajeev Kumar Dua. 2012. Price Discovery in Indian Agricultural Commodity Markets. International Journal of Accounting and Financial Reporting 2. doi:10.5296/ijafr.v2i2.2224.
Sen, Abhijit. 2008. Report of the expert committee to study the impact of futures trading on agricultural commodity prices. Government of India: Ministry of Consumer Affairs.
Shakeel, Moonis, and Shriram Purankar. 2014. Price discovery mechanism of spot and futures market in India: A case of selected Agri commodities. International Research Journal of Business and Management 8: 50–61.
Shihabudheen, M.T., and Puja Padhi. 2010. Price discovery and volatility spillover effect in Indian commodity market. Indian Journal of Agricultural Economics 65: 101–117.
Silvapulle, Param, and Imad A. Moosa. 1999. The relationship between spot and futures prices: Evidence from the crude oil market. Journal of Futures Markets 19: 175–193. doi:10.1002/(SICI)1096-9934(199904)19:2<175::AID-FUT3>3.0.CO;2-H.
Singh, N.P., V. Shunmugam, and S. Garg. 2009. How efficient are futures market operations in mitigating price risk? An explorative analysis. Indian Journal of Agricultural Economics 64: 324–332.
Srinivasan, P. 2012. Price discovery and volatility spillovers in Indian spot-futures commodity market. IUP Journal of Behavioral Finance 9: 70–85.
Tomek, William G., and Hikaru Hanawa Peterson. 2001. Risk management in agricultural markets: A review. Journal of Futures Markets 21: 953–985. doi:10.1002/fut.2004.
Wang, H.Holly, and Bingfan Ke. 2005. Efficiency tests of agricultural commodity futures markets in China. Australian Journal of Agricultural and Resource Economics 49: 125–141. doi:10.1111/j.1467-8489.2005.00283.x.
Author information
Authors and Affiliations
Corresponding author
Appendices
Appendices
Rights and permissions
About this article
Cite this article
Inani, S.K. Price Discovery and Efficiency of Indian Agricultural Commodity Futures Market: An Empirical Investigation. J. Quant. Econ. 16, 129–154 (2018). https://doi.org/10.1007/s40953-017-0074-7
Published:
Issue Date:
DOI: https://doi.org/10.1007/s40953-017-0074-7
Keywords
- Price discovery
- Agricultural commodities
- Lead-lag relationship
- Information share
- Market efficiency
- Futures market