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Efficiency Analysis of Future Markets in India for Agricultural Commodities: Using Cointegration and Causality Tests

Efficiency Analysis of Future Markets in India for Agricultural Commodities: Using Cointegration and Causality Tests. Jabir Ali and Kriti Bardhan Gupta Agriculture Management Centre Indian Institute of Management Lucknow – 226 013. Objectives.

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Efficiency Analysis of Future Markets in India for Agricultural Commodities: Using Cointegration and Causality Tests

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  1. Efficiency Analysis of Future Markets in India for Agricultural Commodities: Using Cointegration and Causality Tests Jabir Ali and Kriti Bardhan Gupta Agriculture Management Centre Indian Institute of Management Lucknow – 226 013

  2. Objectives • Main objective of the present study is to explore the efficiency of agricultural future markets in India • Are the futures prices of agricultural commodities in India cointegrated with spot prices? • What is the direction of influence between future and cash prices? Page 3

  3. Data and Methodology • The daily closing future prices for 23 major agricultural commodities were collected from National Commodity and Derivatives Exchange Ltd (NCDEX) for the period of about last three years. • The daily closing prices of these commodities in spot markets were also collected from NCDEX website for the same period for markets, which were also the place of delivery under future contracts for respective commodities • The efficiency of future markets for different commodities were tested based on cointegration tests using econometric software Page 4

  4. Johansen's Cointegration Tests Statistics • Based on cointegration analysis of futures and sport prices of 23 agricultural commodities: • The commodities can be grouped into three categories – • No cointegration • Cointegration with null hypothesis of zero cointegrating vectors, and • Cointegration with null hypothesis of non zero cointegrating vectors Page 5

  5. Cointegration Tests (contd.) • Commodities with no cointegration • Wheat, Rice, Coffee, Arhar • Cointegration with null hypotehesis of zero cointegrating vectors • Wheat, Rice, Coffee, Arhar, Masur, Groundnut in shell, Maize, Urad, Pepper, Cottonseed oil cake, Mentha, Potato, Raw jute • Cointegration with null hypothesis of non zero cointegrating vectors • Guarseed, Cashew Page 6

  6. Granger Causality Tests • Based on the tests, the commodities can be grouped into three categories – • Unidirectional • Forward Price Spot Price • Unidirectional • Spot Price Future Price • Bi-directional • Spot Price Future Price Page 7

  7. Granger Causality Tests (contd.) • Unidirectional (Forward Price Spot Price) • Wheat, Chickpea, Castor seed, Soybean, Sugar, Chilli, Jeera, Turmeric, Mustard seed oil cake and Guarseed • Unidirectional (Spot Price Future Price) • Rice, Cofee, Masur, Groundnut in shell and Cashew • Bi-directional (Spot Price Future Price) • Arhar, Maize, Urad, Pepper, Cottonseed oil cake, Mentha, Potato, Raw jute Page 8

  8. Categorization based on Cointegration and Causality Causality Page 9

  9. Summary and Conclusions • Government market intervention limited to some foodgrains only and getting reduced over time • Role of future market for food grain become important in price discovery and risk management • Commodity exchanges can play an important role in achieving unfulfilled objective of agricultural price policy (i.e., promotion of alternative crops for sustainable agriculture • Sustainability of future agricultural commodity market depends on: • transparency and efficiency of its functioning in terms of price discovery, price risk management, flexible contract specification, controlling unfair speculation, commodity delivery system & coverage, infrastructural support etc. Page 10

  10. Summary and Conclusions • Empirical findings indicating the existence of a long-term relationship between future and spot prices • The relationship not uniform for different commodities • futures markets have enough ability to predict subsequent spot prices i.e. to discover prices in spot market for certain commodities • that future markets for these commodities may be said to be performing quite efficiently Page 11

  11. Summary and Conclusions • Majority of primary stakeholders not participating in the agricultural commodity market due to low level of commodity surplus • Possibility of their inclusion in the future market needs due attention • Integration of different formal and informal institutions at local level such as e-kiosks, Self Help Groups (SHGs), cooperatives, banks, warehouses, government agencies and private participants quite important for expanding future commodity trading and information dissemination Page 12

  12. Thanks ! Page 13

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