COMPETENCE AND EFFICACY OF COMMODITY FUTURES MARKET: DISSECTION OF PRICE DISCOVERY, VOLATILITY, AND HEDGING

In this paper, we have attempted to examine the Indian agricultural commodity futures market in terms of price discovery, hedging efficiency, and volatility. We examine whether the agricultural commodity market is efficient enough to discover the spot prices and help in risk management. We further investigate the hedging efficiency in this market, and the existence and the direction of volatility spillover. The analysis is based on the near-month contracts for the period 2010–2015 and for five agricultural commodities, namely, chana, chilli, jeera, soya bean, and turmeric. We have used cointegration test, Granger causality test, and vector error correction (VEC) model to assess the price discovery mechanism, and the speed and direction of adjustment of the markets. Hedging efficiency is examined using ordinary least squares (OLS) regression. We have used an exponential generalised autoregressive conditional heteroskedasticity (EGARCH) model to assess the net risk in each market. A bivariate EGARCH model is used to capture the volatility spillover, and value at risk (VaR) is used to estimate the downside risk. We conclude that the spot market leads the futures market, which implies non-efficiency of the futures market. Further, the lead-lag relationship varies from commodity to commodity. Additionally, downside risk exists in both the markets, and volatility is transmitted from the spot market to the futures market. The agricultural commodity futures market is found to lack hedging efficiency. The findings related to market dynamics can be useful for decision-making purpose by investors. Regulators must investigate the matters related to the inefficiency of the market and take steps to bring in improvements in this segment.