Does Indian Commodity Futures Markets Exhibit Price Discovery? An Empirical Analysis

Abstract

Price discovery function analyses the dynamics of futures and spot price behavior in an asset’s intertemporal dimensions. The present study examines the price discovery function of the bullion, metal, and energy commodity futures and spot prices through the Granger causality and Johansen–Juselius cointegration tests. The Granger causality test results show bidirectional causality between the spot and futures returns for gold, silver, aluminum, lead, nickel, and zinc. The Johansen cointegration test shows that spot and futures prices are in the long-run equilibrium path for silver, aluminum, lead, nickel, zinc, crude oil, and natural gas. The vector error correction model results suggest that both the spot and futures markets are equally efficient in price discovery for the nickel. The spot market leads the futures market in price discovery for copper and zinc. However, the futures market leads the spot market in price discovery for silver, aluminum, and lead. The findings of the study suggest the market participants for implementing hedging and arbitrage strategies. It also helps the market regulators to examine the stability of these rapidly growing commodity futures markets in India.