Price Discovery in Futures and Spot

Commodity Markets in India

Pratap Ch. Biswal & Raghavendra Badaskar

T. A. Pai Management Institute, Manipal

National Workshop on Commodity Research, 10th October,

2007, India International Centre, New Delhi.
Background of this Study
• The Indian commodity futures markets recorded a 373%
growth during 2005-06
• Still there are quite apprehensions about commodity
futures market in India, particularly from politicians
• The Finance Minister P Chidambaram expressed strong
conviction about the forwards/futures market and urged
all political parties to support Forward Contracts
(Regulation) Amendment Bill 2006.
• CPM and JD (U) opposed the bill, the CPM wanted
essential commodities to be banned from futures trading.
• JD (U) suggested that the commodities exchange Act
should be repealed
Derivation of the Objective
• There has been widespread interest in the relationship
between commodity futures market and spot trading
• Objective is to examine the role of commodity futures
market in performing the function of price discovery in
India.
• The price discovery function depends on whether new
information is reflected first on futures or spot prices.
• The significance of price discovery depends upon a
close relationship between futures and spot price.
Methodology
• The price linkage between futures market and spot
market would be investigated using cointegration
(Johansen, 1991) analysis and Error Correction.
• Cointegration analysis measures the extent to which two
markets have achieved a long run equilibrium.
• Error Correction dynamics characterize the price
discovery process, whereby markets attempt to find
equilibrium.
Data

• Exchanges: MCX and NCDEX

• Market Base Study: Indices would be used
• Data: Spot and Futures
• Indices: 4 from MCX and 1 from NCDEX
Suggestions Please!!!

Thank you!!!