Information Transmission between India and International Commodities Futures Market: An Empirical Study for Bullion and Metals

Abstract

This study examines the process of information transmission in futures prices of bullion (gold and silver) and metals (aluminum, copper, and zinc) between India, represented by MCX, and its global counterparts trading platforms, such as COMEX, LME, and SHFE, for the period of 2005 to 2012. Structural breaks are identified for all sample series, which capture the impact of the recent economic crisis on these commodity markets. The price discovery results confirm that there is a long-term equilibrium relationship among the futures prices of examined trading platforms in each commodity series, with the exception of aluminum. The MGARCH results of volatility spillovers indicate that, in the case of bullion, MCX seems to be more dominant than COMEX, implying that it is no longer a satellite market, while in case of metals, LME seems to play the dominant role followed by MCX and SHFE. The research contributes to the commodity market literature for emerging economies.

Domestic and International Information Linkages between Gold Spot and Futures Markets: An Empirical Study for India

“…As seen from the above results relating to the full sample period (August 2008 to March 2015), MCX has lost the existing price linkages with all counterpart exchanges abroad (cointegration exists only with TOCOM, but even that is weak). However, based on break point analysis, since cointegration is now seen only till 2013, which is supported by Berlia and Sehgal 38 that indicated strong cointegration till 2012, the results of the present study showing the absence of cointegration after 2013 imply that MCX's international character was destroyed in 2013. This could be ascribed to several reasons, such as the sudden rise in gold prices in second half of 2012 as well as the depreciation of the Rupee, which may have naturally impacted MCX's transactions more than transactions on international exchanges, particularly since the Indian government took several measures to restrict demand for gold.…”

“…Cointegration results for MCX and each of the five international platforms during the full period covered in the study show no cointegration between gold futures at MCX and four international exchanges (COMEX, DGCX, SMX, and HKE), with the fifth exchange (TOCOM) showing cointegration with MCX, but only through the trace test. 48, vii This is a significant result as Berlia and Sehgal 38 show strong cointegration between gold futures at MCX and the international exchange studied (COMEX) from January 2005 to April 2012. The absence of cointegration observed in the present study (from August 2008 to March 2015) could be a result of several reasons, as discussed subsequently in this section, but two developments during 2013 in this regard are specifically noted.…”

“…At international level, however, the break that occurred in August 2013 appears to have destroyed the price linkages between the domestic and international platforms, because long-term equilibrium relationship is seen to be totally absent in the post-structural break period (from August 2013 onwards), whereas strong cointegration had been observed between MCX and COMEX up to 2012. 38 In the pre-structural break period, price linkages are observed, but India is seen to be dominated by all international exchanges, except TOCOM. The volatility spillover process also seems to have been impacted by the break, because during the pre-break period, India is observed to dominate TOCOM and HKE, while in the post-break period, India is seen to have lost its dominant role vis-à-vis TOCOM and has retained it only with respect to HKE where gold futures have been discontinued in March 2015 owing to illiquid contracts.…”

Domestic and International Information Linkages for Indian Commodities Market in the Pre- and Post-CTT Periods

“…2 An efficient price discovery process can be understood in terms of how fast the market price adjusts to new information 3 and also how swiftly the information flows from one market to the other market. 4 Further, the contribution of volatility spillovers to the enhanced understanding of the information transmission process is also studied by. 5,6 The additional information provided about the effect of shock in one market on another assist in characterizing the market as dominant or satellite trading platform.…”

“…Sehgal et al 27 indicate futures to lead the spot in price discovery for zinc, copper, and crude oil amongst other commodities and confirm volatility spillover for zinc along with the Soybean and Natural gas for the period, November 2003 to March 2011. Berlia and Sehgal 4 study the information linkages between Indian (MCX) and international exchanges for bullion (COMEX) and metals (LME and SHFE) from 2005 to 2012. The study reports COMEX leading MCX in the price discovery and vice versa in the case of short- and long-term volatility spillover.…”