Factors Influencing Commodity Futures Prices in India: A Polynomial Distributed Lag Model
Abstract
The objective of this paper is to study the factors influencing commodity futures prices of the Indian commodity market. Five factors have been considered in this study, namely: spot price, the U.S. dollar exchange rate against rupees, market wide information, risk free rate of interest, and financial speculation. To test the long-run equilibrium relationships between commodity futures prices and the factors, Johansen’s Cointegration test has been used. The short-run relationships have been verified by Vector Error Correction Model. Finally, the lag relationships of these factors with the commodity futures price, is modelled by Almon Polynomial Distributed Lag model. The study shows that spot price, market wide information, financial speculation and exchange rate of the US dollar influence the futures price. However, the degree of impact depends on the commodity and on the period of analysis. Additionally, risk free rate of interest does not show influence on the futures prices.References
Abhyankar, A. H. (1995). Return and volatility dynamics in the FT-SE 100 stock index and stock index futures markets. Journal of Futures Markets 15(4), 457-488.
Asche, F., & Guttormemesen, A. G. (2002). Lead lag relationship between futures and spot prices. Discussion Paper D-15/2001, Department of Economics and Social Science, Agricultural University of Norway.
Bai, J., & Perron, P. (2003a). Computation and analysis of multiple structural change models. Journal of Applied Econometrics, 18, 1-22.
Baillie, R. T., & Myers, R. J. (1991). Bivariate GARCH estimation of the optimal commodity futures hedge. Journal of Applied Econometrics, 6, 109-124.
Author. (2010). Effect of Futures Trading on the Volatility of Spot Market in the Context of Indian Agricultural Commodity Market. GITAM Review of International Business, 3(1), 41-61.
Author. (2013). Dynamic Relationship Between Futures Trading and Spot Price Volatility: Evidence from Indian Commodity Market. The IUP Journal of Applied Finance,19(4), 5-19.
Chance, D. M., Brooks, R. (2010). Advanced derivatives and strategies. Introduction to Derivatives and Risk Management, 483–515.
Chang, J. S. K., & Fang, H. (1990). An intertemporal measure of hedging effectiveness.
The Journal of Futures Markets, 10, 307-321.
Charlebois, P., & Hamann, N. (2010). The consequences of a strong depreciation of the U.S. dollar on agricultural markets. Retrieved January 14, 2014, from http://publications.gc.ca/collections/ collection_2011/agr/A38-4-21-2010-eng.pdf
Choudhury, A. (2011). Food price hikes: How much is due to excessive speculation?. Economic and Polytical Weekly, 40 (28), 12-15.
Choudhary, K., & Bajaj, S. (2012). Intraday lead/lag relationships between the futures and spot market , Eurasian Journal of Business and Economics, 5 (9), 165-186.
Engle, R. F., & Granger, C. W. J. (1987). Co-integration and error correction: representation, estimation and testing. Econometrica, 55(2), 251-276.
Giot, P. (2003). The information content of implied volatility in agricultural commodity markets. Journal of Futures Markets, 23(5), 441–454.
Gupta, K. & Singh, B. (2006a). Price discovery and causality in spot and futures markets in India. The ICFAI Journal of Derivatives Markets, 3(1), 30-41.
Helbling, T., Mercer-Blackman, V., & Cheng, K. (2008). Commodities boom. Finance & Development, 12, 10-15.
Iyer, V., & Metha, H. (2007). Price discovery and convergence in the indian commodities market: A two regime threshold VAR approach. Paper presented at the Nation al Workshop on Commodity Research, NCDEX Institute of Commodity Markets & Research(NICR).
Irwin, S., & Good, D.L. (2009). Market instability in a new era of corn, soybean, and wheat prices. Retrieved October 02, 2013, from http://www.choicesmagazine.org/magazine/article.php?article=56
Johansen, S. (1991). Estimation and hypothesis testing of co-integration vectors in Gaussian vector autoregressive models. Econometrica, 59(6), 1551- 1580.
Joshi, V., & Little, I. M. D. (1994). India: macroeconomics and political economy. World Bank and Oxford University Press, Washington DC and New Delhi.
Karali, B., & Power, G. J. (2009). What explains high commodity price volatility? Estimating a unified model of common and commodity-specific, high and low-frequency factors. Working Paper No. 49576, Agricultural and Applied Economics Association, Wisconsin.
Masters, M.W., & White, A.K. (2008). The accidental hunt brothers: how institutional
investors are driving up food and energy prices. Retrieved December 29, 2013, from http://www.loe.org/images/content/080919/Act1.pdf
Pagan, A., & Schwert, G.W. (1990). Alternative models for conditional stock volatility. Journal of Econometrics, 45, 267-290.
Praveen, D. G., & Sudhakar, A. (2006). Price discovery and causality in the Indian derivatives market. ICFAI Journal of Derivatives Markets, 3(1), 22-29.
Reddy, Y. V., & Sebastin, A. (2008). Interaction between equity and derivatives markets in India: An entropy approach. ICFAI Journal of Derivatives Markets, 5(1), 18-32.
Siddiqui, M. A. (2009). An application of VAR and Almon Polynomial Distributed Lag models to insurance stocks: Evidence from KSE. Retrieved November 16, 2013, from http://ieeexplore.ieee.org/xpl/articleDetails.jsp?tp=&arnumber=5353173&url=http%3A%2F%2Fieeexplore.ieee.org%2Fxpls%2Fabs_all.jsp%3Farnumber%3D5353173
Srinivasan, T. N. & Wallack, J. (2003). Export performance and the real effective exchange rate. in Anne O Krueger and Sajjid Z Chinoy (eds), Reforming India’s External, Financial, and Fiscal Policies, Stanford University Press.
Tangermann, S. (2011 June). Policy solutions to agricultural market volatility: A synthesis. Retrieved March 11, 2014, from http://ictsd.org/downloads/2011/12/policy-solutions-to-agricultural-market-volatilty.pdf
Veeramani, C. (2008). Impact of exchange rate appreciation on India’s exports. Economic & Political Weekly, 43(22), 10-14.
Yang, J., Bessler, D., & Leatham, D. (2001). Asset storability and hedging effectiveness in commodity futures markets. The Journal of Futures Markets, 21(3), 279-300.
Zapata, H., Fortenbery, T. R., & Armstrong, D. (2005). Price discovery in the world sugar futures and cash markets: Implications for the dominican republic. Staff Paper No. 469, Department of Agricultural & Applied Economics, University of Wisconsian-Madison.
