Futures Trading and Spot Market Volatility: Evidence from Indian Commodity Markets

Sehgal, Sanjay; Rajput, Namita; Dua, Rajeev Kumar

doi:10.5296/ajfa.v4i2.1990

Cited by 23 publications

(21 citation statements)

References 47 publications

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“…The study models volatility as conditional on time because of presence of heteroscedastic error terms (Bala & Premaratne, 2003;Booth, Martikainen, & Tse, 1997;Sehgal, Rajput, & Desting, 2013;Silvapule & Moosa, 1999;Yang et al, 2005). The error terms of asset returns show unequal variances which may be autoregressive over a period of time.…”

Section: Relationship Between Future Liquidity and Spot Volatilitymentioning

confidence: 99%

Agricultural Commodity Trading: Is it Destabilizing Spot Markets?

Gupta¹,

Sehgal

Wadhwa

2018

Vikalpa: The Journal for Decision Makers

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Executive Summary The future trading has been held responsible by certain political and interest groups of enhancing speculative trading activities and causing volatility in the spot market, thereby further spiralling up inflation. This study examines the effect of future of trading activity on spot market volatility. The study first determined the Granger causal relationship between unexpected future trading volume and spot market volatility. It then examined the Granger causal relationship between unexpected open interest and spot market volatility. The spot volatility and liquidity was modelled using EGARCH and unexpected trading volume. The expected trading volume and open interest was calculated by using the 21-day moving average, and the difference between actual and expected component was treated as the unexpected trading volume and unexpected open interest. Empirical results confirm that for chickpeas ( channa), cluster bean ( guar seed), pepper, refined soy oil, and wheat, the future (unexpected) liquidity leads spot market volatility. The causal relationship implies that trading volume, which is a proxy for speculators and day traders, is dominant in the future market and leads volatility in the spot market. The results are in conformity with earlier empirical findings — Yang, Balyeat and Leathan (2005) and Nath and Lingareddy (2008) —that future trading destabilizes the spot market for agricultural commodities. Results show that there is no causal relationship between future open interest and spot volatility for all commodities except refined soy oil and wheat. The findings imply that open interest, which is a proxy of hedging activity, is leading to volatility in spot market for refined soy oil and wheat. The results are in conformity to earlier empirical studies that there is a weak causal feedback between future unexpected open interest and volatility in spot market ( Yang et al., 2005 ). For chickpeas (channa), the increase in volatility in the spot market increases trading activity in the future market. The findings are contrary to earlier empirical evidence ( Chatrath, Ramchander, & Song, 1996 ; Yang et al., 2005 ) that increase in spot volatility reduces future trading activity. However, they are in conformity to Chen, Cuny and Haugen (1995) that increase in spot volatility increases future open interest. The results reveal that the future market has been unable to engage sufficient hedging activity. Thereby, a causal relationship exists only for future trading volume and spot volatility, and not for future open interest and spot volatility. The results have major implications for policymakers, investment managers, and for researchers as well. The study contributes to literature on price discovery, spillovers, and price destabilization for Indian commodity markets.

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Section: Relationship Between Future Liquidity and Spot Volatilitymentioning

confidence: 99%

Agricultural Commodity Trading: Is it Destabilizing Spot Markets?

Gupta¹,

Sehgal

Wadhwa

2018

Vikalpa: The Journal for Decision Makers

View full text Add to dashboard Cite

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“…P. Srinivasan (2012) examined the price discovery process and volatility spillovers in Indian spot-futures commodity markets and the result points to dominant volatility spillovers from spot to futures market. Sehgal et al (2012) examined the futures trading activity on spot price volatility of seven agricultural commodities and found that unexpected futures trading has strong correlation on spot volatility. Chauhan et al (2013) analyzed the market efficiency of the Indian commodity market.…”

Section: Literature Reviewmentioning

confidence: 99%

The volatility of returns from commodity futures: evidence from India

Mukherjee

Goswami

2017

Financ Innov

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“…The results indicated that the price volatility in domestic markets is more than world market which designates there is no suitable price policy or trade strategy in order to manage the price volatility. To reduce the price volatility developing a well-organized spot market with transparency and efficiency should be the first goal of the government and subsequently, proper infrastructure should originate by policymakers to transfer the transactions to the parallel market (Sehgal et al, 2012). In addition, the transmission of shocks and price volatility between three markets analyzed.…”

Section: Findings and Discussionmentioning

confidence: 99%

Volatility Transmission of Barley World Price to the Domestic Market of Iran and the Role of Iran Mercantile Exchange; An Application of Bekk Model

et al. 2019

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Barley is one of the main crops after wheat and rice. The importance of this product increases because it is an essential input in the livestock and poultry industries. The prices of input, which used in the livestock and poultry industries, faced fluctuations in recent years. Thus, in this study, the price fluctuation of barley in the Iran Mercantile Exchange, Iran domestic free market and World Market compared by applying the GARCH model. This model applied to monthly prices of barley from March 2009 to February 2017. Also, the volatility and shock transmission of barley price between these three markets analyzed by the BEKK model. The results showed that the price fluctuations of the domestic market are more than the global market. In addition, the shocks and volatilities of the world and Iran free market transmitted to the Iran Mercantile Exchange. Thus, the use of new financial instruments in the domestic free market is necessary.

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Futures Trading and Spot Market Volatility: Evidence from Indian Commodity Markets

Cited by 23 publications

References 47 publications

Agricultural Commodity Trading: Is it Destabilizing Spot Markets?

Agricultural Commodity Trading: Is it Destabilizing Spot Markets?

The volatility of returns from commodity futures: evidence from India

Volatility Transmission of Barley World Price to the Domestic Market of Iran and the Role of Iran Mercantile Exchange; An Application of Bekk Model

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