Author(s): Syeda Rukhsana Khalid, Asif Hasan
In the present study attempt has been made to examine the price discovery in the commodity futures market of India. Scholastic research investigating price discovery and Market efficiency can be seen mainly in developed economies concentrating on financial securities, derivatives and commodities. In emerging economies for agri-commodities the evidence on “price discovery” is limited. There are very few studies which have investigated it in developing economies like India or China where the commodity futures market is still in a nascent stage. Even more most of the studies in India were carried out for commodities with fewer observations of data or for commodities traded on regional exchanges. This research gap motivated the author to examine the price discovery and Hedging Effectiveness of highly traded agricultural and plantation commodities. The present study reports price discovery, hedge ratios and hedging effectiveness of future contracts in agricultural commodities like turmeric, cotton and rubber. The lead lag relationship is examined between the future and spot prices using the ARDL Bound Test. For the short run dynamics Wald Test was used and Granger causality was applied to ascertain the direction of flow of information. For the present study all the commodities’ future and spot prices are co-integrated and there is bi-directional Granger long and short run causality between them. In the short run, when the commodities series were in disequilibrium the results indicated that greater adjustment was made by the spot price to re-establish the equilibrium except rubber near month and distant month where the speed of adjustment for the future series was more. The present research estimated the hedge ratios and investigated the hedging effectiveness provided by the turmeric, cotton and rubber futures market. The hedge ratios are high for all the commodities and are near to one (naïve hedge ratio). The hedging effectiveness is more than fifty percent (56% to 99%) for all commodities except turmeric (25%). The hedging effectiveness for rubber maturity month contracts (99.04%) and rubber near month contracts (97.55%) are high when compared to rubber distant month contracts (55.99%). This study will help the farmers and traders to transfer their risk from spot to futures market of the specific commodities and protect themselves from the adversities of high price fluctuations in agri-commodities, and will also help the farmers and traders in increasing their bargaining power as they can take cues from the price signals of the futures market.