International Linkages of the Indian Commodity Futures Markets

Abstract

This paper investigates the cross market linkages of Indian commodity futures for nine commodities with futures markets outside India. These commodities range from highly tradable commodities to less tradable agricultural commodities. We analyze the cross market linkages in terms of return and volatility spillovers. The nine commodities consist of two agricultural commodities: Soybean, and Corn, three metals: Aluminum, Copper and Zinc, two precious metals: Gold and Silver, and two energy commodities: Crude oil and Natural gas. Return spillover is investigated through Johansen’s cointegration test, error correction model, Granger causality test and variance decomposition techniques. We apply Bivariate GARCH model (BEKK) to investtigate volatility spillover between India and other World markets. We find that futures prices of agricultural commodities traded at National Commodity Derivatives Exchange, India (NCDEX) and Chicago Board of Trade (CBOT), prices of precious metals traded at Multi Commodity Exchange, India (MCX) and NYMEX, prices of industrial metals traded at MCX and the London Metal Exchange (LME) and prices of energy commodities traded at MCX and NYMEX are cointegrated. In case of commodities, it is found that world markets have bigger (unidirectional) impact on Indian markets. In bivariate model, we found bi-directional return spillover between MCX and LME markets. However, effect of LME on MCX is stronger than the effect of MCX on LME. Results of return and volatility spillovers indicate that the Indian commodity futures markets function as a satellite market and assimilate information from the world market

The volatility of returns from commodity futures: evidence from India

“…They find a positive and significant correlation between volatility and trading volume for all commodities, no significant relationship between volatility and open interest, and an asymmetric relationship between trading volume and open interest. Kumar and Pandey (2011) examined the cross market linkages of Indian commodity futures with futures markets outside India. However, all these studies focus on the price volatility of commodity futures.…”

Price Linkages Among Emerging Gold Futures Markets

“…The literature survey has shown that particular attention has been paid to: commodity futures markets (e.g., among developed markets: Yang et al (2003); among developing markets: Kumar and Pandey (2011)) and stock index futures (e.g., among developed markets: Yang and Bessler (2004); among developing markets: Ahmad and Rahim (2009)). …”

“…As summarized by Kumar and Pandey (2011), the majority of research findings on linkages across different countries' commodity futures markets suggest that there are stronger international market linkages in highly traded commodities compared to relatively less traded commodities, also that a dominant role is played in price discovery process by developed markets.…”

“…In the relevant literature, no study has specifically attempted to capitalize on the price linkages among emerging markets. In one of the few studies in this area, Kumar and Pandey (2011) have detected the cross-border price linkages in gold futures, but focused on a single emerging market (India), in their analyses. In this respect, to our knowledge, this is the first study to examine the price linkages among gold futures using such a large sample consisting of both emerging and developed markets.…”

Volatility Linkages Among Gold Futures in Emerging Markets

“…One of the few studies is Kumar and Pandey (2011), which analyzes the cross-market volatility linkages and spillover effects between Indian and U.S. gold futures. One of the few studies is Kumar and Pandey (2011), which analyzes the cross-market volatility linkages and spillover effects between Indian and U.S. gold futures.…”