Forecasting Short-Term Relationship Between Futures & Spot Price of Pepper & Cardamom Using Vector Error Correction Model

Abstract

The process of determining the price of a commodity based on supply and demand factors is the Price discovery function. The Futures markets play an important role in the price discovery of agricultural commodities. The importance of commodity derivatives markets is increasing every day, especially for a developing nation like India, as the economy becomes more aligned with the global economy. This paper has examined the Price dynamics of Pepper & Cardamom in spot and futures market. The ready market prices and futures prices of pepper released by IPSTA in Kochi from January 2006 to March 2012 have been retrieved from their website in case of pepper. MCX has launched cardamom futures on February 2006. The spot and futures prices from February 2006 to March 2012 released by MCX Ltd., are utilized for the study. The ADF test is used in testing the stationarity levels. The VECM test used provides empirical evidence that there exists a short term relationship between the spot and future prices of Pepper and Cardamom.

Keywords: ADF test, Stationarity, MCX, IPSTA, Vector Error Correction Model