Price discovery and market efficiency of cardamom in India

Abstract

Purpose Transparent and fair price discovery is essential to commodity market participants in the trade value chain for competitive benefit. The purpose of this paper is to investigate the price discovery of Indian cardamom at e-auction, spot and futures markets in addition to the existence of the day of the week effect at e-auction apart from exploring a novel price risk management framework. Design/methodology/approach This study used Johansen co-integration, vector error correction model, Granger causality and regression with dummy variables to understand a day of the week effect in high-value agri-commodity of cardamom e-auction prices. These price data were based on authenticated sources of Spices Board India and Multi Commodity Exchange of India Ltd. Findings The statistical results indicate price discovery exists in the e-auction market and it leads to spot and futures prices. cardamom e-auction prices are negatively related to cardamom futures and positively related to spot prices. It also finds the non-existence of the day of the week effect in the high-value cardamom e-auction system in India. The study revealed that a cardamom e-auction is more active in price discovery than a cardamom futures contract. Research limitations/implications These results shall facilitate policymakers to explore intervention of online forward market mechanism at the national level to ensure price discovery and market efficiency. However, the study did not explore reasons for the non-equilibrium of a cardamom futures contract with spot and e-auction market. Practical implications The results of this study are useful in understanding the price discovery of cardamom e-auction and its role in the spot and futures market. Cardamom price discovery depends upon the e-auction system; any change of auction policy shall be binding on Indian cardamom prices. The introduction of an online forward market mechanism as described in the paper shall facilitate price risk management apart from improving the efficiency of price discovery. Originality/value This is the first study considering cardamom e-auction, spot and futures prices in the price discovery process in India. Statistical results of a day of the week effect clearly show no significant volatility of cardamom prices during the week. Besides, this study did not find the role of cardamom futures contracts intended to serve the economic function of price discovery and price risk management. Hence, suggests policy intervention for implementing an online Forward Market mechanism for Indian cardamom to ensure market efficiency and manage price risk.

Unveiling the Lead-Lag Relationship Among Metal Derivatives in the Multi Commodity Exchange (MCX) of India: A Comprehensive Analysis

“…It is the outcome of interactions among buyers and sellers, taking into account market forces of supply and demand, as well as factors such as transaction size, cost, and location. Price discovery also plays a role in stabilizing spot price volatility (Vijayakumar, 2021).Commodity derivatives in India have seen slower growth compared to equity derivatives, partly due to a lack of complete understanding among investors. Awareness of equity products is higher, leading to their greater popularity.…”

Does Indian Commodity Futures Markets Exhibit Price Discovery? An Empirical Analysis

“…Before estimating the cointegration test in vector autoregressive (VAR) framework, the Granger causality test is conducted to know if any unidirectional or bidirectional causality relationship exists between spot and futures prices, in line with earlier research [15,[18][19][20]22]. Granger causality test is estimated following the equations ( 10) and (11).…”

“…e present study thus attempts to determine the price discovery role of the commodities traded in newly established futures exchanges. Prior studies for India were focused on spot and futures agricultural commodity markets [15][16][17][18][19][20], gold exchange traded funds [21], metals [22], spot and futures index [23,24], daily futures, and spot closing prices for various commodities [25][26][27], both commodities and indices [28]. As compared with earlier literature, the novelty of the current study consists in the fact that three commodity groups are covered, namely, bullion (gold, and silver), metal (aluminum, copper, lead, and zinc), and energy (crude oil and natural gas) over a longer period, respectively, (2006)(2007)(2008)(2009)(2010)(2011)(2012)(2013)(2014)(2015)(2016)(2017)(2018).…”