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

Sinha, Pankaj and Mathur, Kritika (2013): Price, Return and Volatility Linkages of Base Metal Futures traded in India.

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: Futures, Commodity Transaction Tax, GARCH, Base Metals
• Subjects: G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates; G - Financial Economics > G1 - General Financial Markets > G19 - Other; L - Industrial Organization > L6 - Industry Studies: Manufacturing > L61 - Metals and Metal Products ; Cement ; Glass ; Ceramics; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q0 - General > Q02 - Commodity Markets

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