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Price Discovery in Futures and Spot Commodity Markets in India

Price Discovery in Futures and Spot Commodity Markets in India. Pratap Ch. Biswal & Raghavendra Badaskar T. A. Pai Management Institute, Manipal. National Workshop on Commodity Research, 10th October, 2007, India International Centre, New Delhi. Background of this Study.

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Price Discovery in Futures and Spot Commodity Markets in India

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  1. Price Discovery in Futures and Spot Commodity Markets in India Pratap Ch. Biswal & Raghavendra Badaskar T. A. Pai Management Institute, Manipal National Workshop on Commodity Research, 10th October, 2007, India International Centre, New Delhi.

  2. Background of this Study • The Indian commodity futures markets recorded a 373% growth during 2005-06 • Still there are quite apprehensions about commodity futures market in India, particularly from politicians • The Finance Minister P Chidambaram expressed strong conviction about the forwards/futures market and urged all political parties to support Forward Contracts (Regulation) Amendment Bill 2006. • CPM and JD (U) opposed the bill, the CPM wanted essential commodities to be banned from futures trading. • JD (U) suggested that the commodities exchange Act should be repealed

  3. Derivation of the Objective • There has been widespread interest in the relationship between commodity futures market and spot trading • Objective is to examine the role of commodity futures market in performing the function of price discovery in India. • The price discovery function depends on whether new information is reflected first on futures or spot prices. • The significance of price discovery depends upon a close relationship between futures and spot price.

  4. Methodology • The price linkage between futures market and spot market would be investigated using cointegration (Johansen, 1991) analysis and Error Correction. • Cointegration analysis measures the extent to which two markets have achieved a long run equilibrium. • Error Correction dynamics characterize the price discovery process, whereby markets attempt to find equilibrium.

  5. Data • Exchanges: MCX and NCDEX • Market Base Study: Indices would be used • Data: Spot and Futures • Indices: 4 from MCX and 1 from NCDEX

  6. Suggestions Please!!! Thank you!!!

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