https://doi.org/10.53908/NMMR.300101
Volume 30, Issue-1, January 2022
Abstract
Purpose: This paper aims to investigate the price discovery process, persistence of
volatility and spillover of volatility in commodity futures and spot market in India.
Methodology: In this paper, commodities namely, mentha oil, cotton, gold and
aluminium have been selected to explore the process of price discovery, volatility
persistence and spillover of volatility using cointegration test, vector error correction
(VECM), granger causality and GARCH model.
Findings: The results of VECM suggest that price discovery takes place in futures
market in case of all commodities except for mentha oil where price discovery occurs
in spot market. The Block Exogeneity Wald test (granger causality) results also
show that futures market has stronger ability to predict the spot prices. The results of
GARCH model indicate that volatility is persistent for all commodities except mentha
oil futures return. In the support of VECM and granger causality test results, GARCH
model results also indicate that volatility spillovers from futures return to spot return
for all selected commodities except cotton where volatility spillovers from spot return
to futures return.
Practical Implications: The findings of this study significantly contribute to the
Indian commodity derivatives market literature and useful for future researchers,
investors, hedgers, economists and policy makers.
Originality: There are very few studies that have examined the price discovery
process and spillover of volatility using combination of both agricultural and nonagricultural commodities in India.
Key words: Aluminium, Commodity market, Cotton, Mentha oil, Price Discovery
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