Indian commodity markets - a study on causalty, price discovery and risk management

Abstract

Indian Commodity Markets provide an interesting study of contrasts, with tall claims by the exchanges often not supported by evidence based on actual data analysis. It was decided to attempt one such study on causality, price discovery and risk management. This project has been therefore divided into three broad categories, two of them distinctly quantitative in their approach, and one focusing on the strategic aspects. The first part of the quantitative approach skimmed the surface of the commodity markets by picking a variety of commodities and contracts, and testing for stationarity, causality and cointegration. The second part took three commodities (Gur, Jeera and Guar-Seed) with their contracts spanning a year and analysed them in depth for these three plus price discovery and risk management using error-correction models. The results show there is considerable scope for better integration between Spot and Futures for all the three commodities. The study on strategic aspects was focussed completely on Coffee. Coffee, because of an important agricultural commodity, can have a significant impact on the large rural agricultural population of the country. This project looks at ways in which the government and commodity exchanges can play an important role in developing the coffee market in India. Since the volume of coffee futures currently traded on Indian commodity exchanges is abysmally low, the project also suggests some simple strategies by which the futures market can be made more attractive for both sellers and sellers, thereby increasing the liquidity in the market.