Cointegration, Linear and Nonlinear Causality Among Futures with Different Maturities: Evidence from Indian Agricultural Commodity Futures Markets

Posted: 11 Jun 2012

See all articles by Tarun Kumar Soni

Tarun Kumar Soni

Fore School of Management; NITI Aayog

Date Written: June 11, 2012

Abstract

The paper aims to study the market efficiency, unbiasedness and direction of causality among four agricultural commodities futures contracts traded at National Commodity & Derivatives Exchange Ltd. (NCDEX). The study has tested the efficiency and unbiasedness using Johansen's Cointegration approach and direction of causality using linear Toda and Yamamoto (1995) and the nonparametric Diks and Panchenko (2006) causality for forecasting horizons of 28 days, 56 days and 84 days. The study also takes into account the possible effects of cointegration on both linear and nonlinear Granger causality tests. The results of unfiltered linear granger causality provide support to a stronger flow of information from spot to futures. However when cointegration is modeled the causality disappears. The results have important implications on the previous research done on the same issue. Ignoring cointegration among spot and futures prices may result in improperly concluding linear/nonlinear causality in either direction. Further inability of futures to lead spot market urge for further reforms in the agricultural commodity futures through increasing awareness, wider participation, better infrastructure etc. so as to make futures market more efficient in the long run and perform their role of price discovery and risk management more efficiently and effectively.

Keywords: price discovery, market efficiency, commodity markets, futures market, India

JEL Classification: C14, C32, G14

Suggested Citation

Soni, Tarun Kumar, Cointegration, Linear and Nonlinear Causality Among Futures with Different Maturities: Evidence from Indian Agricultural Commodity Futures Markets (June 11, 2012). Available at SSRN: https://ssrn.com/abstract=2081678

Tarun Kumar Soni (Contact Author)

Fore School of Management ( email )

New Delhi
India

NITI Aayog ( email )

NITI Aayog
New Delhi, 100018
India

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