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Vision

Volatility Spillover Effect in

23(4) 374–396, 2019
© 2019 MDI
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DOI: 10.1177/0972262919850916

Empirical Evidence Through journals.sagepub.com/home/vis

Generalized Impulse Response Function

Bhabani Sankar Rout1

Nupur Moni Das2
K. Chandrasekhara Rao1

Abstract
The present work is specifically directed to examine the volatility spillover mechanism in Indian commodity derivatives market. It has
especially focused on comparing the agricultural and metal commodity segment by considering five agri-commodities and five metal
commodities. The study period taken is 2010–2015 for understanding the mechanism between the spot and the futures commod-
ity markets. Generalized impulse response function is mainly used to check the magnitude of volatility spill, pattern of volatility and
lead–lag relationship. The result shows metal commodities are more prominent and investment worthy than agricultural commodities.

Key Words
Volatility Pattern, Lead–Lag Relationship, Influential Direction, Generalized Impulse Response Function, Volatility Spillover

Introduction against the unexpected price movements in cash prices

Commodity derivatives market has been receiving momen-
tum as a separate asset class for investment over the globe.
It has also been considered as diversification mechanism
by various investors. However, Indian commodity deriva-
tives market is still at a nascent stage although it came into
existence as early in 1875. As per Kapil and Kapil (2010),
India shares 7 per cent of the global commodity derivatives
market and further stated that Indian commodity market is
still under development as compared to Chicago Board of
Trade and other developed global commodity market.
Kumar and Sunil (2004) had too supported this argument
by specifically mentioning the agricultural commodities’
futures as immature and inefficient. Derivatives are spe-
cialized hedging instruments that allow the traders to hedge
(Gupta, Choudhary, & Agarwal, 2017). Futures are most
used derivatives instruments in Commodities Derivatives
segment. As defined by (Mahalik, 2014), a future contract
is an agreement to deliver a specified quantity of commo-
dity at a specified future date, at a price (the futures price) to
be paid at the time of delivery. As the prices of future sale
can be predetermined in advance, it operates as a price risk
management tool for volatile prices of commodities in cash
market. Malhotra (2015) established that co-movement
of futures and cash market prices partially or wholly offset
the adverse price movements in physical market by gains
in the futures market. Another major utility of futures
market is price discovery. Price discovery in futures market
is defined as the use of futures prices to determine the

The study may be useful for investors for decision-making purpose. The summarized results are directed towards investment in metal commodities.
Though agricultural commodities have mixed pattern of volatility in long-run, the fluctuations are amounts to be more in spot return due to its own
shock. Therefore, the investments futures market in agricultural commodities are not up to the mark, while, metal commodities are somehow safer
investment avenues.
1 Department of Banking Technology, Pondicherry University, Puducherry, India.
2 Department of Commerce, Assam University, Silchar, Assam, India.

Corresponding author:
Bhabani Sankar Rout, Department of Banking Technology, Pondicherry University, Bharat Ratna Dr B. R. Ambedkar Administrative Building, R. V.
Nagar, Kalapet, Puducherry 605014, India.
E-mail: bsrout3@gmail.com
Rout et al.
prospect of future cash market price (Yang & Leothan,
2001). Singh and Singh (2015) held the view that predic-
tion of price through futures market provides necessary
indicators to producers and consumers about the likely
future spot prices and demand–supply condition.
However, the flow of information depends on various
factors such as trading platform, the nature and content of
information flow, volatility, market size, trade volume,
transparency, technology use, and the like (De Boyrie,
Pavlova, & Parhizgari, 2012). Edward and Rao (2013) also
stated that nascent stage of futures market may lead to
persistence of volatility in prices of commodities. Thus, in
spite of the benefits endowed by the commodity derivatives
to the traders, it brings in challenges along with. A section
of researchers and regulators claims futures trading
destabilize the spot market that accordingly increases spot
price volatility. As both spot and futures markets are
interconnected, apart from price discovery, it is apparent
that if there is volatility in one market, it will transmit to
the other market too. However, such destabilization of cash
prices due to futures trading is supposed to be prevailing
in agricultural commodities market compared to other
commodities. Robles, Torero, and Von Barun (2009) stated
that speculation drives agricultural prices. Edward and Rao
(2013) added that farmers are not highly benefitted through
existence of futures market. In order to monitor the price
movements of several agricultural and essential commo-
dities, futures trading were completely banned in 1996
(Srinivasan, 2011). The financial sector reforms and many
other factors led the regulators to reinitiated futures trading
in some commodities gradually. However, ban was re-
imposed in some commodities during 2007–2009 due to
the fear of inflationary pressure (Sendhil, Kar, Mathur, &
Jha, 2013).
Faster growth of commodity derivatives and instances
of price stability in cash market has created considerable
interest among researchers to examine the mechanism of
volatility spillover in Indian commodity derivatives market.
Volatility spillover is the process of risk transmission from
one market to another or one asset to another. Panda and
Deo (2014) hold that the volatility spillover across the
markets are needed to be studied for explaining the
efficiency of the market, determinining the persistence and
magnitude of the innovation in the financial market over
time and to know how markets are interrelated to develop
effective hedging strategies. The other objectives of
modelling volatility is to provide good forecasts of it that
can then be used for a variety of purposes including port-
folio allocation, evaluation of portfolio, option pricing,
performance measurement, financing decisions, and the
like (Karmakar, 2009).
On this backdrop, we intend to investigate the direction
and magnitude of volatility spillover in Indian commodity
derivatives market. Moreover, one more important empha-
sis of the work is to compare the agricultural and metal
commodity derivatives markets.
375
The remainder of the article is divided into five Sections.
Section ‘Literature Review’ amassed extensive literature
related to derivatives in general and commodity derivatives
in particular. Research methodology used for the work is
summarized in Section ‘Data Surfing and Methodology’.
The interpretation of results is shown in Section ‘Inter-
pretation of Results’ and the last section concludes.
Literature Review
Volatility is a familiar phenomenon in any kind of business.
It is considered as a risk factor in financial markets. Volatility
is defined by Maitra and Dey (2011) as ‘a measure of how
far the current prices of an asset deviates from its average
past prices’. It is also a common characteristic of commodity
markets. It experiences oscillation in the prices of pro-
ducts due to various reasons such as demand-supply gap,
seasonality, and the like; commodity derivatives market is
believed to be a saviour to the traders that provides a
mechanism for the price risk management. The commodity
futures market comprises of three different groups, namely,
commercial consumers, commercial producers and spec-
ulators. The number of producers and consumers are not in
equilibrium and thereby there is always a risk of price varia-
tions on part of both the groups. As more stakeholders
require the price risk management and the participants take
short-term positions by entering and exiting the market
repeatedly, it causes excess volatility (Saranya, 2015).
Now, in a world of interconnectedness, any new informa-
tion, change or impulse in any unit does not take much time
to spread to other units. Therefore, any good or bad news in
a unit impacts not only the particular units, but also other
units too, which are interlinked to each other. This rela-
tionship is applicable also in case of commodity derivatives.
In other words, there is a greater chance of volatility
spillover between the spot and futures market due to its
interdependence. Sahoo and Kumar (2009) argue that
futures markets drives up prices as speculators use liquid
market to manipulate prices, which works against the
interest of growers and consumers. Volatility spillover
occurs when changes in price volatility in one market
produce a lagged impact on volatility in other markets,
over and above local effects (Singh, Kumar, & Deepak,
2015). Edward and Rao (2013) add that the existence of
volatility spillover between two markets suggests important
effect of volatility of returns in one market on the volatility
of returns in the other market. Hoang (2001) explains the
usefulness of studying volatility spillover and said that it
explains about how one large shock increases the volatility
not only in its own asset or market but also in other assets
or market as well. Further, according to Panda and Deo
(2014), the information about the transformation of
volatility from one market to another is a part of market
efficiency. King and Wadhwani (1990) while providing
reasons for volatility spillover expressed in a less than fully
informative equilibrium, investors and security traders act
376
in response straight to publicly available information that
is not available in their local markets and thus information
shocks in one market may have an impact on the pricing
and volatility of other markets.
A wide gamut of literature is available on volatility
spillover with respect to commodities futures market.
Srinivasan (2011) tested the direction of volatility spillovers
in Indian spot—future commodity market and established
that there is volatility spill from spot to futures commodity
market. Saranya (2015) also found the direction from spot to
futures for the majority of the commodities. He further stated
that volatility has found to be gradually declining. On the
other hand, Sendhil et al. (2013) analysed the Indian agri-
cultural commodity derivatives in terms of volatility and the
results reflected existence of volatility in spot market due to
futures. Besides, Edward and Rao (2013) did scrutiny of
volatility spillover using only one commodity, which
illustrated uni-directional causality from futures markets to
the spot market. Kumar and Shollapur (2015) assessed
volatility spillover between spot and futures prices in agri-
cultural futures market and found spillover from futures to
spot in the short run for most of the commodities.
While going through the existing literature on volatility
spillover, researchers have mainly used cointegration,
causality test, VECM and GARCH models to model
volatility (Gregory & Michael, 1996; Kumar & Shollapur,
2015). Koutmos and Tucker (1996) also employed ECM-
EGARC to study volatility spillover between spot and
futures prices of S&P 500. Maitra and Dey (2011) used
GARCH, EGARCH, CGRACH, MGARCH to study spill-
over. Srinivasan (2011) has also used Bivariate EGARCH in
studying volatility spillover. Edward and Rao (2013),
Sendhil et al. (2013), Saranya (2015) and Mitra (2017) have
employed GARCH to model volatility spillover in their
works. Panda and Deo (2014) studied Indian equity and
foreign exchange market spillover with the help of GARCH
and EGARCH. GARCH-M is used by Grieb (2015) while
examining spillover for commodity futures.
A few number of researcher’s have estimated and ass-
essed volatility spillover using impulse response function
(IRF). Krishnamurti, Sevic, and Sevic (2005) had inves-
tigated the validity of regression model when high correlation
exists in between independent variable and present the
application of vector auto regression (VAR) as alternative
techniques. The article has sampled the Dow Jones and S&P
500 stocks. The IRF provides positive responses to the
innovation, especially, a positive impact to the Dow Jones
and S&P volatility. The granger causality also provides
information that, the Dow Jones has comparatively larger
average, volume and price levels than S&P sample. Abdul
Karim and Shabri Abd (2010) have re-examined the stock
market integration and short-run interaction between
the Malaysian stock market and its major trading partner
exchanges, that is, USA, Japan, Singapore, Thailand and
China. Weekly stock indices from January 1992 to May 2008
are considered for analysis. Auto Regressive Distributed
Vision 23(4)
Lag (ARDL) and VAR are used for estimation. The study
found that, the Malayan stock market and other partner
exchanges are integrated. A strong relation among the
partner countries matter a lot for such integration.
Meanwhile, trading also to some extent helps in such
exchange integration. Kim, Lee, and Kim (2010) have
focused on the relationship between the financial crisis of
Korean construction firms and macroeconomic fluctuation.
The study has employed VECM, IRF and variance decom-
position. The study found that, the current ratio is highly
influencing, interest is found to be significant against debt
ratio and fund raising is focused on highly capable financial
intermediaries. Babatunde, Adenikinju, and Adenikinju
(2013) had investigated the interactive relationship betw-
een the oil price shocks and the Nigeria stock market. The
author has applied multivariate vector auto-regression that
helped in estimating generalized IRF and forecast variance
decomposition error. They found that there is an insignifi-
cant positive shock by the stock market to oil price shock
but revert to negative shock after a period of time. The
results are also identical of other variables. The work of
Kholdy and Sohrabian (2014) have focused to compare
and contrast the effect and individual sentiment of US
stocks during boom period, that is, 1990 and boom bust
period 2000. The study has used VAR, IRF to capture the
behaviour of stock against the innovative sentiments. The
results reflected that the sentiments of individual investors
are affected when there is a prolonged upward trend in the
stock prices. But the sentiments of institutional investors
affect the stock returns, when market is volatile. Vardhan,
Sinha, and Vij (2015) investigated the usage of sectorial
indices where we can avail and pinpoint the strategy on
sectorial investment. They also investigated the short-run
and long-run relationship between eight identified sector
indices with the employment of VECM, generalized
impulse response function (GIRF) and variance decom-
position. The long-run relationship is being captured by
VECM. Further, the banking sector is found to be playing
predetermined and integrating role in moving other indices.
Nasir, Ahmad, Ahmad, and Wu (2015) emphasized different
issues of financial stability with reference to economic
growth and price stability with the help of VECM and IRF
with sample range from 1985 (Q1) to 2008 (Q2). The results
showed a strong cointegration between financial and
economic stability even in a non-crisis regime.
Review of the existing studies has provided us fascina-
ting latent magnitudes for research. The previous section
provides us with bizarre reports of past studies. We have
found germane research fissure for tracking down further
study. The key research gap is found to be the comparative
study between agriculture and metal. Though the select
elements are vibrant and dissimilar in their properties and
functionalities, they can be a virtuous competitor for each
other. The second gap is about the methodological facet.
The study has employed the GIRF for understanding the
lead–lag relationship and pattern of volatility that has been
used only by a few researchers to model volatility spillover.
Rout et al.
After having an upright aggregate of literature and
research gap, we are now down the track to frame objectives
for the existing study. The first and foremost focus of the
study is to identify the volatility pattern of agricultural and
metal commodities. Second, to explore the lead and lag
relationship between spot and futures market of both
agricultural and metal commodities towards equilibrium
and last but not the least, to explore the volatility spillover
among the commodities from one market (asset) to another
market (asset).
Data Surfing and Methodology
The further down cited section will provide us an easy
about the data surfing and embark on methodology for this
study.
Data Employed
The study has focused on individual market’s risk pheno-
menon and shock buffer towards entire derivatives market.
The study has gathered data from National Commodities
and Derivatives Exchange (NCDEX) and Multi Com-
modity Exchange (MCX) database from January 2010 to
December 2015 and the data are pigeonholed ‘Near Months’
contracts. The focused commodities are chana, chili, jeera,
soyabean and turmeric. The study has confirmed the assort-
ment of above commodities after brushing up the endur-
ance in trading cycle. In derivatives market, the two diverse
prices (spot price and futures price) are compared in order
to dissect the performance (risk and return) of the underly-
ing asset or contract. The spot and futures prices of select
commodities are extracted from MCX and NCDEX and
the data are used in further analysis after standardization
of sport and futures price. The daily returns are estimated
and used for further analysis. The GIRF is formed after
certain basic analytical criteria, that is, normality test,
serial correlation test and optimal lag selection.
Methodology
The study focused the VAR for forecasting the market
behaviour. The time we understand, the markets are cointe-
grated in long run and have at least cointegrating equation,
we will allow error correction model (ECM) for estimating
the speed of adjustment and correction of risk (both futures
and spot) towards equilibrium. The unrestricted VAR, that
is, ECM is more vibrant than restricted VAR in forecasting
scenario and the performance of ECM and orthogonalised
IRF are similar. In a VAR system, the endogenous vari-
ables are treated as the function of the lagged values of
entire exogenous variables in the system. By observing the
VAR model, we have our basic equation as:
    Ft = a + bS t + f t(1)
377
We can represent Equation (1) as:
n
    Ft - a - bS t = f t(2)
where Ft and St are the futures returns and spot returns
of select commodities at time t. The a and b coefficients
are treated as intercept and slope, respectively. The ‘White
n
Noise Term’ is estimated with f t. The lagged values of first
difference and last lag’s equilibrium error with intercept
term complete the ECM process. The lagged values of first
difference explain the short-run equilibrium, that is, fluc-
tuation in current period prices due to previous period’s
price change. So it is important and justifiable to estimate
statistical significance and magnitude of co-efficient of
lagged value and equilibrium error. So ECM can be
represented as:
n
DFt = d f + a f f t - 1 + b f DFt - 1 + c f DS t - 1 + f f, t(3)
n
DS t = d s + a s f t - 1 + b s DS t - 1 + cs DFt - 1 + f s, t(4)
where the speed of adjustment of one variable over
other variable is described by intercept coefficients, af and
as with a view that at least one coefficient must not be zero.
The equilibrium error, which is a significant part of ECM,
n
is described by f t - 1.
It is observed that, estimated coefficient from VAR
models are inadequate in estimating standard errors due to
insignificant statistical values. In such circumstances, the
impulse response runction (IRF) and variance decom-
position of forecasting error (VDFE) are used to explain
the dynamic effects of shocks to the exogenous variable. In
this study, we observe the pattern of volatility and respons-
iveness of futures market or asset class to the individual
shock generated by each market or asset class, that is, spot
and futures. IRF signifies the one unit shock to one of
the innovation on existing and future exogenous variable. The
variance decomposition of forecasting error separates the
variation in an endogenous variable into the component
shocks to the VAR system, while IRF traces the effects of
one unit shock to exogenous variables in the VAR system.
Therefore, the VDFE provides information about the
relative importance of the innovation in affecting the
variables in VAR (Babatunde et al., 2013).
The IRF is typically biased by certain ordering of
variables on the main stream. The ordering of variables
may change the desired functions and autonomy of the
concerned variables. The ordering basically known as
‘Cholesky ordering’, the orthogonal decomposition of the
reduced form of innovation is dysfunctional and the
Cholesky decomposition are unaffected by the ordering of
variables in GIRF (Pesaran & Shin, 1998). The responses
are distinctive and comprehensive responses of historical
patterns of correlation that are observed in different isolated
shocks.
378
p dimensional time and series gt
So now the VAR for 6
will be like:
  g t = {D t + | i = 1 pg t - 1 + f t(5)
k
t = 1,… . .,T,
where gt is covariance stationary, integrated of order d,
which is possibly cointegrated. The Dt is a vector with a
deterministic variables and last but not least, ft is assumed
to be zero mean and positive covariance matrix ~. The
equation for h-steps forecast error for gt will be:
g t + h - Q [g t + h | L t] = | j = 0 Z j f t + h - j,(6)
h-1
where the 6 p #6 p are the matrices and Zj is given by
Z 0 = L 6p and Lt is described as an set of past information
from the period gs and includes the period t and the entire
time path Dt.
   Z j = | i = 1 p i Z j - i j $ 1(7)
min k, j
Now, the Zj matrices can be resolute from pi matrices
and further the equation can be formed in GIRF at a
significant way, which is first derived by Koop et al. in
1996.
YL g (h, d, L t - 1) = Q [g t + h | f t = d, L t - 1]
   (8)
= Q [g t + h | L t - 1,]
     YL g (h, d, L t - 1) = Z h d(9)
YL g (h, d, L t - 1) = Q [g t + h | f jt = d j, L t - 1]
   (10)
= Q [g t + h | L t - 1,]
where d is a vector and it is the measure for time profile
of any GIRF. The fjt = dj is an alternative to innovative
element of ft. Now, let ft is a Gaussian and the standard
deviation is dj = v jj .
1 Let v = vech(~); and the estimator v can be denoted
  Q [f t | f jt = v jj ] = ~u j v -jj 2 (11)
where uj is the jth column of L 6p ,
1
YL g (h, v jj , L t - 1) = Z h ~u j v -jj 2 (12)
Now, if we formed a matrix by taking responses in gt+h
p #6
from one standard deviation shock to fjt, then the 6 p,
matrix will be:
 (13)
Vision 23(4)
Similarly, if we can write the equation for GIRF, the
equation will be like:
(14)
where the jth column is given by YL g (h, v jj , L t - 1).
1
The diagonal matrix of ~ will be like, } = ~ 2 = R -1.
So now we are about to determine the asymptotic
covariance matrix for estimating Zh} and in the same time,
we are also undergone some assumptions, such as:
1. The cointegration rank restriction is observed in
VAR model, so Ø does not include cointegration
vector.
2. Ø only includes the parameters on stationary trans-
formation of g.
3. Zh is depending upon ᾱ dimensional vector, that is,
Qet ar .
4. Zh is differentiable with respect to Ø.
5. Ø includes the elements of pi and do not includes
any elements of ℵ or ~.
6. In a VAR model, the gt is cointegrated with an order
(1, 1), it denotes that, Ø includes all the lagged first
difference parameters of gt.
7. In 0 1 r 1 6 p , the cointegration relation will be
₰gt–1.
8. The estimator Ø can be denoted by ʘ, based on a
sample of R observations.
d
   R (9 - Q) t ar (0, R Q)(15)
where t ar is an ar dimensional Gaussian distribution, d
will be the convergence to the main distribution and R Q
will be the positive semi-definite. The vech is a column
loading element who only takes the upper side and below
side values in the diagonal.
as ή;
R (hl - v)
d
t 6p (6p + 1) (0, R Q)(16)
2
The Q and hl , which are asymptotical and these are free
from all restrictions. Now, we can rewrite the equation by
adding ⧬ and D 6p , which is Kronecker Product and
Duplication matrix, respectively (Magnus & Neudecker,
1
1998). D ~6p = and Dl6p is the Moore Penrose inverse of
Dl6p
D 6p (Babatunde et al., 2013).
 (17)
Now, we can replace the Equation (10), the estimator ϐ,
is denoted by λ, and rewrite as:
Rout et al. 379

(18)    (26)

where Now, we can rewrite the VAR model as:

Dg t = "D t + | i = 1 1 i Dg t - 1 + /Ol g t - 1 + f t(27)

k-1

(19)
where Q = vec (1 1, f, 1 k - 1 / and according to
Johansen (1996), / & Ο are full matrices of
p # r(0 1 r 1 6
6 p ), now the new equation will be:
Now, the matrix form of partial derivative, that is,
dvec}
will be:    Z = O y (/ly 1O y) -1 /ly(28)
dvl
By applying 1 = L ∏p - | i = 1 1 i, the new equation will
k-1
dvecR 1
     = - x 6p R 3 xl6p (20) be:
d~ l 2

p 2 #6
where x 6p = = 6 p 0 - 1 and the matrix will be:         (29)

      (30)

The asymptotic distribution of Z} can easily observed

     (21)
Now, the differential of dvec} will be:
   (22)
from the Equation (30) and such distributions are for the
ML estimator of Z (Paruolo, 1997) and the long-run GIRF
for the associating convergence will be zero and its fully
depends upon the long-run impact matrix Z which converge
to finite matrix.
Let, ϐ = Z}; and estimator ϐ = m and the previous
Equations (18) and (19) will be:
(31)

where
We know, dvec~ = D 6p dv

(23) (32)

If r is a cointegrating vector and gt is a cointegration

p # r full rank matrix denoted by O. Now, the matrix form of partial derivative shown in
order (1, 1), then the 6
Here we can dram GIRF for the cointegration relation with dvec}
Equation (20), that is, will be,
an estimator of O denoted by, Ȏ dvl

| - O) v
    R (O 0(24)     (33)

According to Johansen (1996), the ML estimator, that where     matrix and the new
is, O, satisfies all the required assumptions and "v typically
provides the convergence in probability. matrix will be:
Let, the cointegrating relation may be described as,
mt = O'gt, then the GIRF of mt+h for one standard deviation
shock to ft will be:  (34)

  (25)
On the ground of notorious structural shock, and ~ is
Now, by adding O'ϐh to the Equation (18), the new diagonal, the generalized IRF is similar as structural VAR
equation will be: and dissimilar in other circumstances.
380
Now, we will restructure the ECM equation with GIRF,
the Equations (3) and (4) will be:
   Ft = O 0 + | i = 1 O i S t - 1 + f t(35)
1
   Ft = / 0 + | i = 1 / i S t - 1 + f t(36)
U
And
   S t = O 0 + | i = 1 O i Ft - 1 + f t(35)
1
   S t = / 0 + | i = 1 / i Ft - 1 + f t(36)
U
where i = 1,… …, 1 or i = 1,… …,U. The 1 and U are
the lag order that are determined by optimal lag selection
criteria based on AIC and SIC.
Interpretation of Results
The following are the interpretations of the analysis carried
out in the previous section. The study behaves as a slave of
the analytical outcomes.
Stationarity of Data
The stationarity of data is imperative before certain
technical analysis. The stationarity justifies the randomness
of data points over the research period. In other words, the
stationarity also provides information on the distribution of
the data on the normal curve. Greater the stationarity of
data set, lower will be the risk. The variables that contain
unit root become stationary after differencing it (Greene,
2012). Table A1 presents the most common practice
recommended by Engle and Granger (1987), that is, ADF
test of a unit root. Table A1 provides detailed statistics of
stationarity and we can simply comprehend that both the
agricultural and metal commodities are found stationary at
first difference. Stationarity is also a prerequisite for ana-
lysing the cointegration between two asset class or market
(Johansen, 1996; Johansen & Juselius, 1990).
Cointegration Test
The variables are now being a feature of non-stationary
at level and stationary at first difference. According to
Johansen (1996), the long-run association must be cap-
tured with the raw data subject to, the variables must
stationary at first difference. The association between two
diverse asset class or market provides us the information
flow therein (Sehgal, Ahmad, & Deisting, 2011). The null
hypothesis for r = 0 states that no cointegration equation
exists in between the variable and for r = 1, there exists at
least one cointegration equation, which furthermore leads
to gage the restricted VAR model. Table A2 explains
the statistical analysis for the association between two
diverse asset class or markets. We can envisage both agri-
cultural and metal commodities have an informational
Vision 23(4)
transmission in the long run so that the results of
Johansen’s cointegration test provides at least one cointe-
grating equation exists between two variables, that is,
spot price and futures price. The results of Johansen’s
cointegration test further allow us to perform ECM
(restricted VAR) in lieu of ascertaining the lead–lag rela-
tionship and pattern of volatility by using GIRF.
Influential Direction
The influential direction is otherwise called as cause-and-
effect relationship. This is an unambiguous measure that
limits the direction of information from one asset to another
asset. The measure of influential direction is directed by
Granger causality test. Moreover, this test provides us
influential landmark by one variable to other and
correspondingly, the direction of influence. Now, the
estimation for causality portrayed in Table A3 shows the
commodities such as chana, jeera, soybean, aluminium,
lead, nickel and zinc are bidirectional, that is, the impact is
two-sided, either spot influence futures or futures influences
spot and commodities such as chili, turmeric and copper
are unidirectional, that is, either of the two variable impact
to other variables. The statistics are crucial for estimating
the variable status for further analysis.
Pattern of Volatility
The GIRF technique is applied in order to visualize the
pattern of volatility. The patterns are essential in order to
capture the movement of the volatility trend. Table A4
clarifies the periodical responses of one standard deviation
shock to the error term of select agricultural and metal
commodities and if we look at Figure A1 (Agriculture) and
Figure A2 (Metal), we can straightforwardly envisage the
trend of responses occurred by different exogenous shock
in different period. The below mentioned section discusses
the pattern of volatility of both agricultural and metal
commodities in detailed manner.
Agricultural Commodities
In Table 1, the select agricultural commodities for the study
have shown a radical pattern of volatility over five year’s
horizon. The results of generalized IRF are more obvious
and practical in nature for hedging decision-making
purpose. When one standard deviation shock is applied to
various commodities, their responses are vibrant enough to
provide the pattern of fluctuation from the day one.
The study has isolated the time prospect into two different
fragments, that is, the first part is short run, which includes
the periods up to three days, and second part is long run,
which includes the periods from fourth to nine days. When
one standard deviation shock is given to the spot return of
commodity chana, both spot return and futures return
are continuously down trending in short run and the trend
takes a pick and remains constant in long run. Similarly, we
have observed the exact pattern of volatility, when we have
Rout et al. 381

Table 1. Volatility Pattern of Agricultural Commodities

Responses of SR Responses of FR
Commodities Short Run Long Run Short Run Long Run Result
Chana SR . ­-– . ­-– . &­-–
FR . ­-– . ­-–
Chili SR .- .– .- – .- & –
FR .- .– .-­ –
Jeera SR . .- . .-­ . & .-
FR . .- . .-
Soyabean SR . .-­ . .-­ . & .-­
FR . .- . .-
Turmeric SR . .- . -– . & -–
FR . .- . -–
. = Downside; - = upside; .-­= instabe or fluctuate; – = constant
Source: The above pattern is structured from estimated results of GIRF (Table A4).

Table 2. Volatility Pattern of Metal Commodities

Responses of SR Responses of FR
Commodities Short Run Long Run Short Run Long Run Result
Aluminium SR .- . .- . .-­& .
FR .- . .- .
Copper SR .- . - . .- & .
FR .- . . .
Lead SR .- . -­ . .-­& .
FR .- . .- .
Nickel SR .- . -­ . .-­& .
FR .- . . .
Zinc SR .- .- .- .- .- & .-
FR .- .- .- .-
. = downside; - = upside; .-­= instabe or fluctuate; – = constant
Source: The above pattern is structured from estimated results of GIRF (Table A4).

employed one standard deviation shock to futures return.
In Table 1, chili provides a fluctuate pattern of volatility
of both spot and futures return in the short-run period,
when we have given shock to both spot and futures return
and in the long-run period, the volatility pattern is ini-
tially downwards and remains constant afterwards in spot
return innovation or shock and constant in futures return
innovation.
The commodities such as jeera, soyabean and turmeric,
the pattern of volatility for short run and long run is down
trending, once shock is given to both spot return and futures
return, but the trend becomes instable in long run for both
spot and futures return, while the impulse is generated in
futures return.
Metal Commodities
The study in the other hand has focused the metal com-
modities for measuring and comparing the volatility trend
with agricultural commodities. In Table 2, the metals are
likely to be more consistent in the array of return than
agricultural commodities. The select commodities such as
aluminium, copper, lead, nickel and zinc has instable res-
ponses in short run and down trend responses in long run
while one standard deviation impulse generated in spot
return. But when, shock is employed to futures return,
mixed responses have been captured in metal commodities.
In short run, the commodities such as aluminium and zinc
have instable pattern of volatility, where as in copper and
nickel, the sport return goes upward and futures return
drives towards down. Lead has assorted result in short run,
the spot return goes upward, however, the futures return
has uneven pattern of volatility. But the scenario is
consistent in all the select commodities except zinc for
long-run pattern of volatility, that is, in both spot return and
futures return innovation, there is a downward trend of
both spot and futures return in long run. But zinc provides
382 Vision 23(4)

a mixed flavour of up and downward trend in long run for
both spot and futures return (Figure A1).
Lead Lag Relationship and Volatility Spillover
Table 3 transmits the information into more logical
approach. The select agricultural commodities are found to
be spot trended. Though there is a spillover effect is gotten
in both the way, that is, spot to futures and futures to spot,
the magnitude of volatility spillover is tilted towards
futures to spot and the direction is headed for spot. Over
again, if we focused in Table 3, we can understand, when
the shock is applied futures return, spot shows a higher
fluctuation then futures, but in case of spot, the futures
return tends to be lower than spot return. So in the above
context, the movement to spot is wilder than futures or we
can say the futures return is lagging behind spot return.
Table 4 explains the transmission of information from
one market (asset) to other market (asset). At this juncture,
we can guesstimate the magnitude of spillover of select
metal commodities. Though it is observed that there is a
bidirectional volatility spillover effect, the information
flow is headed for spot to futures direction. Consistently, if
we observe, when one standard deviation shock is applied
to futures return, fluctuation shows more in futures return
compare to spot return. In the select metal commodities,
the futures is leading while, spot lagging behind it.

Table 3. Quantum of Variable Responses to Generalized One Conclusion

SD Shock Agricultural Commodities
The study has applied GIRF as a tool for measuring the
Responses pattern of volatility, volatility spillover and lead–lag rela-
Generalized
One SD Futures Spot Magnitude tionship. The method is found effective; hence, it carried out
Commodities Shock to Return Return of Spillover an evocative inference from the study. The study debates
Chana Futures return Low High Futures to about pattern of volatility and found spot and futures return
Spot return Low High spot of select agricultural commodities are down trended in the
Chili Futures return Low High Futures to short run and instable in long run when generalized one
Spot return Low High spot standard deviation shock is applied to both spot and futures
Jeera Futures return Low High Futures to return; but such scenario is opposite in metal commodities,
Spot return Low High spot the metals are found to be more unstable in the short run
Soyabean Futures return Low High Futures to and remains down trended in long run, when generalized
Spot return Low High spot
one standard deviation shock is applied. As we have wit-
Turmeric Futures return Low High Futures to
Spot return Low High spot nessed the bidirectional volatility spillover in both metal and
agricultural commodities, but the magnitude of volatility
Source: Structured from estimated results of GIRF (Table A4).
transmission is headed for futures to spot in agricultural and
spot to futures in metal commodities. The discovery of price
Table 4. Quantum of Variable Responses to Generalized One and risk mitigation through hedging practices are effective
SD Shock Metal Commodities in case of futures leading situation, but the study shows that
the futures market is fruitless in case of agricultural com-
Generalized Responses modities. Again, in agricultural commodities, the spot return
One SD Futures Spot Magnitude is found to be more unstable due to its own shock but in
Commodities Shock to Return Return of Spillover metal commodities, the futures return shows instability due
Aluminium Futures return High Low Spot to to its own shock in the market.
Spot return High Low futures
Copper Futures return High Low Spot to Declaration of Conflicting Interests
Spot return High Low futures
Lead Futures return High Low Spot to The authors declared no potential conflicts of interest with respect
Spot return High Low futures to the research, authorship and/or publication of this article.
Nickel Futures return High Low Spot to
Spot return High Low futures Funding
Zinc Futures return Low High Spot to
The authors received no financial support for the research,
Spot return Low High futures
authorship and/or publication of this article.
Source: Structured from estimated results of GIRF (Table A4).
Rout et al. 383

Appendix
Table A1. ADF Unit Root Test

Spot Price Futures Price

Agriculture Level First Difference Level First Difference

Commodities T-stats Prob* T-stats Prob* T-stats Prob* T-stats Prob*
Chana –0.871 0.798 –36.095 0.000 –0.885 0.793 –37.750 0.000
Chili –0.125 0.945 –23.326 0.000 –0.705 0.843 –28.295 0.000
Jeera –1.937 0.316 –17.825 0.000 –2.729 0.069 –37.268 0.000
Soyabean –1.333 0.616 –29.715 0.000 –1.556 0.505 –35.238 0.000
Turmeric –1.373 0.597 –25.893 0.000 –1.476 0.546 –29.159 0.000

Metal Level First Difference Level First Difference

Commodities T-stats Prob* T-stats Prob* T-stats Prob* T-stats Prob*
Aluminium –3.521 0.008 –43.906 0.000 –3.321 0.014 –43.927 0.000
Cupper –2.242 0.192 –25.999 0.000 –2.033 0.273 –25.753 0.000
Lead –2.766 0.063 –42.891 0.000 –2.658 0.082 –41.114 0.000
Nickel –1.710 0.426 –41.050 0.000 –1.527 0.520 –39.016 0.000
Zinc –2.297 0.173 –44.054 0.000 –2.155 0.223 –42.093 0.000
Source: The authors.

Table A2. Cointegration Test

Johansen’s Cointegration Test

Agricultural No. of Cointegrating 0.5

Commodities Equations Max Eigen Statistic Trace Statistic Critical Value Prob. **
Chana r=0 58.943 59.663 15.495 0.000*
r#0 0.720 0.720 3.841 0.396
Chili r=0 22.011 22.061 15.495 0.000*
r#0 0.050 0.050 3.841 0.824
Jeera r=0 148.321 152.929 15.495 0.000*
r#0 4.608 4.608 3.841 0.032
Soyabean r=0 153.137 155.128 15.495 0.000*
r#0 1.990 1.990 3.841 0.158
Turmeric r=0 43.222 45.441 15.495 0.000*
r#0 2.219 2.219 3.841 0.136
No. of Cointegrating 0.5
Metal Commodities Equations Max Eigen Statistic Trace Statistic Critical Value Prob. **
Aluminium r=0 291.693 302.353 15.495 0.000*
r#0 10.661 10.661 3.841 0.131
Copper r=0 207.412 212.461 15.495 0.000*
r#0 5.049 5.049 3.841 0.025
Lead r=0 359.592 367.097 15.495 0.000*
r#0 7.505 7.505 3.841 0.006
Nickel r=0 412.390 414.833 15.495 0.000*
r#0 2.443 2.443 3.841 0.118
Zinc r=0 407.419 412.103 15.495 0.000*
r#0 4.684 4.684 3.841 0.030
Source: The authors.
Notes: Max-eigenvalue test indicates two cointegrating equations at the 0.05 level. * denotes rejection of the hypothesis at the 0.05 level.
**MacKinnon-Haug-Michelis (1999) p-values.
384 Vision 23(4)

Table A3. Granger Causality Test

Agricultural
Commodities Null Hypotheses F-Statistic Probability Decision
Chana Ft price does not Granger-Cause St price 201.310 0.000 Bi-directional
St price does not Granger-Cause Ft price 13.649 0.000
Chili Ft price does not Granger-Cause St price 2.885 0.056 Uni-directional
St price does not Granger-Cause Ft price 4.919 0.008
Jeera Ft price does not Granger-Cause St price 135.433 0.000 Bi-directional
St price does not Granger-Cause Ft price 4.815 0.008
Soyabean Ft price does not Granger-Cause St price 71.296 0.000 Bi-directional
St price does not Granger-Cause Ft price 12.277 0.000
Turmeric Ft price does not Granger-Cause St price 21.192 0.000 Uni-directional
St price does not Granger-Cause Ft price 0.531 0.588
Metal
Commodities Null Hypotheses F-Statistic Prob. Decision
Aluminium Ft price does not Granger-Cause St price 383.571 0.000 Bi-directional
St price does not Granger-Cause Ft price 9.243 0.000
Copper Ft price does not Granger-Cause St price 306.764 0.000 Uni-directional
St price does not Granger-Cause Ft price 0.201 0.818
Lead Ft price does not Granger-Cause St price 534.130 0.000 Bi-directional
St price does not Granger-Cause Ft price 3.302 0.037
Nickel Ft price does not Granger-Cause St price 492.559 0.000 Bi-directional
St price does not Granger-Cause Ft price 4.741 0.009
Zinc Ft price does not Granger-Cause St price 385.390 0.000 Bi-directional
St price does not Granger-Cause Ft price 4.934 0.007
Source: The authors.
Note: ‘Ft’ denotes futures price and ‘St’ denotes spot price.

Table A4. Generalized Impulse Response Function

Agricultural Commodities
Period 1 Period 4 Period 10
Response of FR Response of SR Response of FR Response of SR Response of FR Response of SR
Futures Spot Futures Spot Futures Spot Futures Spot Futures Spot Futures Spot
Commodities Return Return Return Return Return Return Return Return Return Return Return Return
Chana 0.0193 0.0146 0.0110 0.0146 0.0091 0.0090 0.0088 0.0093 0.0099 0.0100 0.0098 0.0100
Chili 0.0347 0.0231 0.0136 0.0166 0.0065 0.0084 0.0070 0.0108 0.0053 0.0078 0.0066 0.0096
Jeera 0.0174 0.0115 0.0052 0.0079 0.0020 0.0025 0.0016 0.0020 0.0020 0.0024 0.0017 0.0021
Soyabean 0.0195 0.0155 0.0115 0.0145 0.0095 0.0105 0.0103 0.0106 0.0102 0.0110 0.0102 0.0095
Turmeric 0.0344 0.0246 0.0177 0.0248 0.0116 0.0143 0.0120 0.0150 0.0104 0.0123 0.0112 0.0132
Metal Commodities
Period 1 Period 4 Period 10
Response of FR Response of SR Response of FR Response of SR Response of FR Response of SR
Futures Spot Futures Spot Futures Spot Futures Spot Futures Spot Futures Spot
Commodities Return Return Return Return Return Return Return Return Return Return Return Return
Aluminium 0.0143 0.0101 0.0089 0.0125 0.0099 0.0094 0.0106 0.0103 0.0090 0.0083 0.0086 0.0078
Copper 0.0241 0.0191 0.0149 0.0188 0.0164 0.0161 0.0162 0.0168 0.0137 0.0126 0.0136 0.0123
Lead 0.0191 0.0137 0.0111 0.0155 0.0129 0.0125 0.0138 0.0134 0.0099 0.0085 0.0081 0.0066
Nickel 0.0209 0.0163 0.0136 0.0175 0.0136 0.0133 0.0136 0.0140 0.0101 0.0094 0.0087 0.0077
Zinc 0.0154 0.0106 0.0094 0.0136 0.0078 0.0069 0.0073 0.0069 0.0071 0.0058 0.0071 0.0057
Source: The authors.
Note: FR: futures return; SR: spot return.
Rout et al. 385

Chana

(Figure A1 continued)
386 Vision 23(4)

(Figure A1 continued)
Chilli

(Figure A1 continued)
Rout et al. 387

(Figure A1 continued)
Jeera

(Figure A1 continued)
388 Vision 23(4)

(Figure A1 continued)

Soyabean

(Figure A1 continued)
Rout et al. 389

(Figure A1 continued)

Turmeric

Figure A1. Generalized Impulse Response Function (Agricultural)

Source: Authors’ own estimation.
390 Vision 23(4)

Aluminum

(Figure A2 continued)
Rout et al. 391

(Figure A2 continued)

Copper

(Figure A2 continued)
392 Vision 23(4)

(Figure A2 continued)

Lead

(Figure A2 continued)
Rout et al. 393

(Figure A2 continued)

Nickel

(Figure A2 continued)
394 Vision 23(4)

(Figure A2 continued)

Zinc

Figure A2. Generalized Impulse Response Function (Metal)

Source: Authors’ own estimation.
Rout et al.
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About the Authors
Bhabani Sankar Rout (bsrout3@gmail.com) is a PhD
scholar in the Department of Banking Technology,
Pondicherry University working under the supervision of
Professor K. Chandrasekhara Rao. His broad research
interest lies in the field of financial economics. Inter alia,
he enjoys working on price risk management, spillover
effects, information asymmetry, contango and normal
backwardation, efficiency of commodity derivatives. Apart
from pure finance, he is also interested to work in banking
Vision 23(4)
and finance. He has published around 10 papers in various
UGC listed journals and recently one paper is accepted for
publishing by IIMB Management Review, Elsevier.
Nupur Moni Das (nupurmoni@outlook.com) is a Senior
Research Fellow in the Department of Commerce, Assam
University, Silchar working under the supervision of Dr
Joyeeta Deb. Her broad area of research is Banking and
Finance. She especially deals with risk management,
efficiency, capital adequacy and insolvency of the banking
sector. She also enjoys working in the area of derivatives.
She has published two papers in indexed journals and
one paper is recently accepted for publication in IIMB
Management Review, Elsevier.
K. Chandrasekhara Rao (kcsrao9894255526@gmail.
com) is a Senior Professor in the Department of Banking
Technology, Pondicherry University. His areas of special-
ization are financial economics, derivatives market,
financial management, security analysis and portfolio
management, global financial markets and international
banking. He has as many as 40 publications to his credit.