Impact of Futures Trading on Indian Agricultural Commodity Market

Mukherjee, Dr. Kedar nath (2011): Impact of Futures Trading on Indian Agricultural Commodity Market.

Abstract

Besides the well-established fact towards the requirement of market based instrument, there is always been a doubt, as expressed by different bodies, on the usefulness and suitability of futures contract in developing the underlying agricultural commodity market, especially in agricultural based economy like India. Therefore, an attempt has been made to re-validate the impact of futures trading on agricultural commodity market in India. The daily price information in spot and futures markets, for a period of 7 years (2004 – 2010), for 9 major agricultural commodities, taken from different categories of Agri-products, are incorporated into various econometric models to test the concerned objective. Like most of the other studies undertaken on world and Indian commodity market, the present study have also exhibited that even though the inflationary pressure on commodity, especially agricultural commodity, prices have gone up sharply after the introduction of commodity futures contracts, the destabilizing effect of the futures contract is casual in nature and tends to vary over a long period of time. The empirical findings significantly shows that comparative advantage of futures market in disseminating information, leading to a significant price discovery and risk management, that can again help to successfully develop the underlying commodity market in India. Therefore instead of curbing the commodity futures market, it can always be suggested to strengthen the market structure to achieve the broader target.

• Item Type: MPRA Paper
• Language: English
• Keywords: Commodity Futures, Lead-Lag Relation, Efficiency, Volatility
• Subjects: G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency ; Event Studies ; Insider Trading; G - Financial Economics > G1 - General Financial Markets > G10 - General

References

Abhyankar, A. (1998), Linear and Nonlinear Granger Causality: Evidence from the U.K. Stock Index Futures Market, The Journal of Futures Markets 18 (5), 519–540.

Abhyankar, Abhay H (June 1995) Return and volatility dynamics in the FTSE 100 stock index and stock index futures markets, The Journal of Futures Markets 15(4) 457–488

Ahuja, N. L. (2006); Commodity Derivatives Market in India: Development, Regulation and Future Prospects; International Research Journal of Finance and Economics; Issue 2

Bessler, David A. and Covey, Ted (August 1991) Cointegration: some results on U.S. cattle prices, The Journal of Futures Markets 11(4) 461–74

Bollerslev, Tim, Chou, Ray Y. and Kroner, Kenneth F. (April 1992) ARCH modelling in finance: a review of the theory and empirical evidence, Journal of Econometrics 52(1)5–59

Bose, S (2008); Commodity Futures Market in India - A Study of Trends in the Notional Multi-Commodity Indices; ICRA Bulletin of Money and Finance

Brorsen, B.Wade, Oellermann, Charles M. and Farris, Paul L. (August 1989) The live cattle futures market and daily cash price movements, The Journal of Futures Markets 9(4) 273–82

Chan K. (1992), A Further Analysis of the Lead-Lag Relationship between the Cash Market and Stock Index Futures Market, Review of Financial Studies 5 (1), 123-152.

Chan, K. (1992) A further analysis of the lead-lag relationship between the cash market and stock index futures market, Review of Financial Studies 5(1) 123–52

Chan, K., Chan, K. C. and Karolyi, G. A. (1991) Intra–day volatility in the stock index and stock index futures market, Review of Financial Studies 4(4) 657–84

Chatrath A. and Song F. (1998), Information and Volatility in Futures and Spot Markets: The Case of Japanese Yen, Journal of Futures Markets 18 (2), 201-223.

Cheung, Y. W. and Ng, N. (1990) The dynamics of S&P 500 index and index futures intra–day price volatilities, Review of Futures Markets 9(2) 458–86

Chin K., Chan, K.C. and Karolyi, G.A. (1991), Intraday Volatility in the Stock Market and Stock Index Futures Markets, Review of Financial Studies 4 (4), 637-684.

Choudhry, T. (1997), Short-run Deviations and Volatility in Spot and Futures Stock Returns: Evidence from Australia, Hong-Kong and Japan, The Journal of Futures Markets 17 (6), 689-705.

Cox, Charles C. (December 1976) Futures trading and market information, Journal of Political Economy 84(6) 1215–37

De Jong F. and Donders M.W.M. (1998), Intraday Lead-Lag Relationship between the Futures, Options and Stock Market, European Finance Review 1, 337-359.

Dickey, David A. and Fuller, Wayne A. (July 1981) Likelihood ratio statistics for autoregressive time series with a unit root, Econometrica 49(4) 1057–72

Dickey, David A. and Fuller, Wayne A. (June 1979) Distribution of estimates for autoregressive time series with a unit root, Journal of the American Statistical Association 74(366) 427–31

Engle, Robert F. and Granger, Clive W. J. (March 1987) Cointegration and error correction: representation, estimation and testing, Econometrica 55(2) 251–76

Engle, Robert F. and Yoo, Byung Sam (Annals 1987) Forecasting and testing in cointegrated systems, Journal of Econometrics 35 143–59

Ficci (October 2002) Background paper, International conference on commodity futures and derivatives trading, Mumbai

Fleming, Jeff, Ostdiek, Barbara and Whaley, Robert (June 1996) Trading costs and the relative rates of price discovery in stock futures and options markets, The Journal of Futures Markets 16(4) 353–87

Fortenbery, T. Randall and Zapata, Hector O. (December 1993) An examination of cointegration relations between futures and local grain markets, The Journal of Futures Markets 13(8) 921–32

Foster, Andrew J. (July 1996) Price discovery in oil markets: a time varying analysis of the 1990–91 Gulf conflict, Energy Economics 18(3) 231–46

Frederick H. deB. Harris, Thomas H. McInish, Gary L. Shoesmith and Robert A. Wood (December 1995) Cointegration, error correction and price discovery on informationally linked security markets, Journal of Financial and Quantitative Analysis 30(4) 563–79

Frida Youssef (October 2000) Integrated report on commodity exchanges and Forward Markets Commission, World Bank project for the improvement of the commodities futures markets in India

Garbade, K. D. and Silber, William L. (May 1983) Price movements and price discovery in futures and cash markets, The Review of Economics and Statistics 65(2) 289–97

Ghosh, Asim (April 1993) Cointegration and error correction models: intertemporal causality between index and futures prices, The Journal of Futures Markets 13(2) 193–98

Government of India (1952): Forward Contracts (Regulation) Act 1952.

Government of India (2003): Report of the Task Force on Convergence of securities and Commodity Derivatives Markets (Chairman, Wajahat Habibullah).

Government of India (July 2000) National Agriculture Policy, Department of Agriculture and Cooperation, Ministry of Agriculture, New Delhi

Government of India (September 1994) Report of the Committee on Forward Markets (Kabra Committee), Ministry of Civil Supplies, Consumer Affairs and Public Distribution, New Delhi

Government of India (September 2003) Draft report of the inter-ministerial task force on convergence of securities and commodity derivative markets, Ministry of Consumer Affairs, Food and Public Distribution, New Delhi

Government of India, September, 1994. Report of the Committee on Forward Markets (Kabra Committee)

Granger, Clive W. J. (Annals, 1981) Some properties of time series data and their use in econometric model speci- fication, Journal of Econometrics 16 121–30

Granger, Clive W. J. (August 1986) Developments in the study of cointegrated economic variables, Oxford Bulletin of Economics and Statistics 48(3) 213–28

Granger, Clive W. J. (September 1988) Some recent developments in the concept of causality, Journal of Econometrics 39(1) 199–211

Grünbichler, A., Longstaff, F. A. and Schwartz, E. S. (1994), Electronic Screen Trading and the Transmission of Information: An Empirical Examination, Journal of Financial Intermediation 3 (2), 166-187.

Grunbichler, F. Longstaff and Schwartz, E. (April 1994) Electronic screen trading and the transmission of information: an empirical examination, Journal of Financial Intermediation 3(2) 166–87

Harris L. (1989), The October 1987 S&P 500 Stock-Futures Basis, Journal of Finance 44, 77-99. Hasbrouck, Joel (September 1995) One security, many markets: determining the contributions to price discovery, The Journal of Finance 50(4) 1175–99

Herbst, Anthony F., McCormack, Joseph P. and West, Elizabeth N. (August 1987) Investigation of a lead–lag relationship between spot indices and their futures contracts, The Journal of Futures Markets 7(4) 373–81

Iihara et al. (1996), Intraday Return Dynamics between the Cash and the Futures Markets in Japan, Journal of Futures Markets 16, 147-162.

Kawaller, I.P., Koch, P., and Koch T. (1987), The Temporal Price Relationship between S&P 500 Futures and S&P 500 Index, Journal of Finance 41, 107 – 125.

Kawaller, Ira G., Koch, Paul D. and Koch, Timothy W. (December 1987) The temporal price relationship between S&P 500 futures and the S&P 500 index, Journal of Finance 42(5) 1309–29

Kiran Karande (2006), A Study of Castorseed Futures Market in India, Doctoral, Indira Gandhi Institute of Development Research Mumbai, India

Kolamkar, D. S. (2003) Regulation and policy issues for commodity derivatives in India, in Susan Thomas (ed.) Derivatives Markets in India, Oxford University Press, India

Koontz, Stephen R., Garcia, Philip and Hudson, Michael A. (April 1990) Dominant–satellite relationship between live cattle cash and futures markets, The Journal of Futures Markets 10(2) 123–36

Koutmos, G. and Tucker, M. (1996), Temporal Relationships and Dynamic Interactions between Spot and Futures Stock Markets, The Journal of Futures Markets 16, 55-69.

Kumar, B., Singh, P. and Pandey, A. (2008); Hedging Effectiveness of Constant and Time Varying Hedge Ratio in Indian Stock and Commodity Futures Markets; Working Paper, Indian Institute of Management (Ahmedabad), India.

Leuthold, Raymond M., Garcia, Philip, Brian D. Adam and Wayne I. Park (February 1989) An examination of the necessary and sufficient conditions for market efficiency: the case of hogs, Applied Economics 21(2) 193–204

Lokare, S. M. (2007); Commodity Derivatives and Price Risk Management: An Empirical Anecdote; Reserve Bank of India Occasional Papers, Vol. 28, No. 2

MahmoudWahab and Malek Lashgari (October 1993) Price dynamics and error correction in stock index and stock index futures markets: a cointegration approach, The Journal of Futures Markets 13(7) 711–42

Min, Jae H. and Najand, Mohammad (April 1999) A further investigation of the lead-lag relationship between the spot market and stock index futures: early evidence from Korea, The Journal of Futures Markets 19(2) 217–32

Morgan, C. W. (2000); Commodity Futures Markets in LDCs: A Review and Prospects; CREDIT Research Paper, University of Nottingham, UK

Naik, Gopal and Jain, Sudhir Kumar (July 2002) Indian agricultural commodity futures markets: a performance survey Economic and Political Weekly 37(30) 3161–73

Nath, G. C. and Lingareddy, T. (2007), Commodity derivatives contributing for rise or fall in risk, Working Paper

Ng., N. (1987), Detecting Spot Price Forecasts in Futures Prices Using Causality Tests, Review of Futures Markets 6, 250-267.

Oellermann, Charles M. and Farris, Paul L. (Winter 1985) Futures or cash: which market leads live beef cattle prices? The Journal of Futures Markets 5(4) 529–38

Oellermann, Charles M., Brorsen, B. Wade and Farris, Paul L. (April 1989) Price discovery for feeder cattle, The Journal of Futures Markets 9(2) 113–21

Pericli, Andreas and Koutmos, Gregory (December 1997) Index futures and options and stock market volatility, The Journal of Futures Markets 17(8) 957–74

Pizzi, M.A. et al. (1998), An Examination of the Relationship between Stock Index Cash and Futures Markets: A Cointegration Approach, Journal of Futures Market 18 (3), 297-305.

Pizzi, Michael A., Economopoulos, Andrew J. and O’Neill, Heather M. (May 1998) An examination of the relationship between stock index cash and futures markets: a cointegration approach, The Journal of Futures Markets 18(3) 297–305

Quan, Jing (April 1992) Two step testing procedure for price discovery role of futures prices, The Journal of Futures Markets 12(2) 139–49

Raizada, G. and Sahi, G.S. (2006); Commodity Futures Market Efficiency in India and Effect on Inflation; Working Paper, Indian Institute of Management (Lucknow), India

Ross, Stephen A. (March 1989) Information and volatility: the no-arbitrage martingale approach to timing and resolution irrelevancy, The Journal of Finance 44(1) 1–17

Sahadevan, K. G. (July 2002) Saving agricultural commodity exchanges: growth constraints and revival policy options Economic and Political Weekly 37(30) 3153–60

Sahi, G S ( ); Influence of Commodity Derivatives on Volatility of Underlying; Working Paper, Indian Institute of Management (Lucknow), India

Schwarz, Thomas V. and Szakmary, Andrew C. (Aril 1994) Price discovery in petroleum markets: arbitrage cointegration and the time interval of analysis, The Journal of Futures Markets 14(2) 147–67

Sen Abhijit (2008), Report of the Expert Committee to Study the Impact of Futures Trading on Agricultural Commodity Prices, Government of India

Sen, S. and Paul, M. (2010); Trading In India’s Commodity Future Markets; Working Paper, Institute For Studies In Industrial Development

Shyy, G., Vijayraghavan V. and Scott-Quinn B. (1996), A Further Investigation of the Lead-Lag Relationship between the Cash Market and Stock Index Futures Market with the Use of Bid/Ask Quotes: The Case of France, Journal of Futures Markets 16 (4), 405 – 420.

Shyy, Gang, Vijayraghavan, Vasumathi and Scott-Quinn, Brian (June 1996) A further investigation of the lead-lag relationship between the cash market and stock index futures market with the use of bid/ask quotes: the case of France, The Journal of Futures Markets 16(4) 405–20

Silvapulle, Param and Moosa, Imad A. (April 1999) The relationship between spot and futures prices: evidence from the crude oil market, The Journal of Futures Markets 19(2) 175–93

Singh, J.B. ( ); Futures Markets and Price Stabilization - Evidence from Indian Hessian Market; Working Paper, SGGS College of Commerce (University of Delhi), Delhi, India

Stoll, H.R., and Whaley, R.E., (1990), The dynamics of stock index and stock index futures returns, Journal of Financial and Quantitative Analysis, 25 (4), 441-468.

Stoll, Hans R. and Whaley, Robert E. (December 1990) The dynamics of stock index and stock index futures returns, Journal of Financial and Quantitative Analysis 25(4) 441–68

Thenmozhi M. (2002), Futures Trading, Information and Spot Price Volatility of NSE-50 Index Futures Contract, NSE Research Paper, NSE India; Source: www.nseindia.com

Thomas S. (2003), Agricultural commodity markets in India: Policy issues for growth, Working Paper, Indira Gandhi Institute of Development Research, Mumbai, INDIA.

Tse, Yiuman (December 1999) Price discovery and volatility spillovers in the DJIA index and futures markets, The Journal of Futures Markets 19(8) 911–30

UNCTAD (2007), “Development Impacts of Commodity Futures Exchanges in Emerging Markets”, Report of the UNCTAD Study Group on Emerging Commodity Exchanges.

Varangis P., Larson D., and Anderson J.R. (2002); Agricultural Markets and Risks: Management of the Latter, Not the Former; Working Paper, Australian National University, Australia