Price Discovery and Volatility Spillover in Commodity Futures and Spot Market in India: An Empirical Analysis

Abstract

Purpose: This paper aims to investigate the price discovery process, persistence of volatility and spillover of volatility in commodity futures and spot market in India. Methodology: In this paper, commodities namely, mentha oil, cotton, gold and aluminium have been selected to explore the process of price discovery, volatility persistence and spillover of volatility using cointegration test, vector error correction (VECM), granger causality and GARCH model. Findings: The results of VECM suggest that price discovery takes place in futures market in case of all commodities except for mentha oil where price discovery occurs in spot market. The Block Exogeneity Wald test (granger causality) results also show that futures market has stronger ability to predict the spot prices. The results of GARCH model indicate that volatility is persistent for all commodities except mentha oil futures return. In the support of VECM and granger causality test results, GARCH model results also indicate that volatility spillovers from futures return to spot return for all selected commodities except cotton where volatility spillovers from spot return to futures return. Practical Implications: The findings of this study significantly contribute to the Indian commodity derivatives market literature and useful for future researchers, investors, hedgers, economists and policy makers. Originality: There are very few studies that have examined the price discovery process and spillover of volatility using combination of both agricultural and nonagricultural commodities in India.