Co-Integration of Agricultural Commodities Spot and Future Prices – An Evidence from India

Abstract

Since Post Liberalization in 1991, the Derivative Market in India has seen over all growth, consisting the need for price discovery of spot and the future market. Where the study is based on the collection of the daily closing of Spot and Future Prices on the 7 Selected Agricultural Commodities such as Barley, Chana, Castor Seed, Coriander (Dhanya), Soya Bean, Turmeric and Wheat based annually for 5 years from 2013-17 from Market data on historical spot and future quotes (NCDEX). The study considers to identify the Lead & Lag relationship between the Spot and Future Prices of the underlying assets and to verify if there is a co-integration between them, while the spot and futures markets are in partial equilibrium. The research conducted to analyze the spot and future prices through techniques such as the Vector Error Correction Model, Johansen Cointegration Test and Granger Causality Test. Which the results show that the 5 commodity Spot does not Granger cause Future price and 2 commodity Future does not Granger cause Spot Prices. In case for Barley, Chana, Coriander, Soya bean and Turmeric, we reject null hypothesis and state that Spot prices has a leading impact over the Future Price. For Castor seed and Wheat there is Future prices impact on the spot price where we reject hypothesis and state that Castor and Wheat future prices have an impact on Spot prices having granger non-causality and there is a unidirectional causality running from spot to future market vice-versa. With Findings in Johansen’s Cointegration test also stating that we need to reject null hypothesis and accept alternative hypothesis that there is co-integration between the spot and future prices for the study undertaken.