Role of Futures Market in Price Discovery: A Study of Indian Commodity Market

Abstract

This paper investigates the price discovery function of futures market for two non precious metals - nickel and zinc on Multi-Commodity Exchange (MCX) using Johansen’s co-integration test, VECM and Granger causality test. The analysis used daily data on spot prices and near month futures prices of two non-precious metals over the period from April 2011 to March 2014 which is obtained from MCX website. The study concludes that both the series of spot and futures prices are co-integrated of order one, and exhibit a stable long-run equilibrium relationship. The results of VECM show that there is a bi-directional causality in spot and futures market but the futures market is found to be more sound in terms of discounting new information than the spot market.

Keywords: Price Discovery, Commodity Market, Co-integration Test, VECM

JEL Classification: C32, G14