The present article is an attempt to empirically investigate the long-term market efficiency and price discovery in Indian commodity futures market. The study has been conducted with eight commodities which include two agricultural commodities, two industrial commodities, two precious metal and two energy commodities. Sophisticated statistical methods like restricted cointegration and vector error correction model (VECM) are used to analyse the spot and futures prices time series. Restricted cointegration test shows that near-month futures prices for all the commodities are cointegrated with the spot prices but futures prices of all the commodities are inefficient to predict the future spot price. Indian commodity futures market evidenced as the thinly traded market (Kumar & Pandey, 2013, Journal of Indian Business Research, 5(2), 101–121) rejects the null hypothesis of efficiency and unbiasedness for all the eight commodities which reconfirms the result of Fortenbery and Zapata (1997, Journal of Futures Markets, 17(3), 279–301). The presence of short-term biases in the Indian futures market is evidenced in the results of VECM model which indicates the presence of informational efficiency. The statistically significant value of past prices of spot and futures confirm the short-term inefficiency and biasedness. The significant value of error correction term (ECT) of futures prices suggests that commodity futures are the most important indicator of commodity price movements. The important implication of the results is for market traders. They can use the futures prices to discover the new equilibrium and earn profits by transmitting it to the spot market. The better understanding of the interconnectedness of these market would be useful for policymakers who try to establish stability in the financial markets.
BaillieR.T.LippensR.E. & McMahonP.C. (1983). Testing rational expectations and efficiency in the foreign exchange market. Econometrica: Journal of the Econometric Society, 51(3), 553–563.
2.
BeckS.E. (1994). Cointegration and market efficiency in commodities futures markets. Applied Economics, 26(3), 249–257.
3.
BesslerD.A. & CoveyT. (1991). Cointegration: Some results on US cattle prices. Journal of Futures Markets, 11(4), 461–474.
4.
BoseS. (2008). The role of futures market in aggravating commodity price inflation and the future of commodity futures in India. Money and Finance, 4(1), 1–28.
5.
BrockmanP. & TseY. (1995). Information shares in Canadian agricultural cash and cattle. Applied Economics Letters, 2(10), 335–338.
6.
ChenA.S. & LinJ.W. (2004). Cointegration and detectable linear and nonlinear causality: Analysis using the London Metal Exchange lead contract. Applied Economics, 36(11), 1157–1167.
7.
ChowdhuryA.R. (1991). Futures market efficiency: Evidence from cointegration tests. Journal of Futures Markets, 11(5), 577–589.
8.
DickeyD.A. & FullerW.A. (1979). Distribution of the estimators for autoregressive time series with a unit root. Journal of the American Statistical Association, 74(366a), 427–431.
9.
EaswaranR.S. & RamasundaramP. (2008). Whether commodity futures market in agriculture is efficient in price discovery? An econometric analysis. Agricultural Economics Research Review, 21(conf.), 337–344.
10.
EngleR.F. & GrangerC.W.J. (1987). Co-integration and error correction: Representation, estimation and testing. Econometrica: Journal of the Econometric Society, 55(2), 251–276.
11.
FamaE.F. (1965). The behavior of stock-market prices. The Journal of Business, 38(1), 34–105.
12.
FamaE.F. & FrenchK.R. (1987). Commodity futures prices: Some evidence on forecast power, premiums, and the theory of storage. The Journal of Business, 60(1), 55–73.
13.
FortenberyT.R. & ZapataH.O. (1997). An evaluation of price linkages between futures and cash markets for cheddar cheese. Journal of Futures Markets, 17(3), 279–301.
14.
FrankJ. & GarciaP. (2009). Time-varying risk premium: further evidence in agricultural futures markets. Applied Economics, 41(6), 715–725.
15.
GarbadeK. & SilberW.L. (1983). Price movement and price discovery in futures and cash markets. The Review of Economics and Statistics, 65(2), 289–297.
16.
GrayR.W. (1961). The search for a risk premium. Journal of Political Economy, 69(3), 250–260.
17.
GujaratiD.N. (2009). Basic econometrics. New York, US: Tata McGraw-Hill Education.
18.
HakkioC.S. (1981). Expectations and the forward exchange rate. International Economic Review, 22(3), 663–678.
19.
HerbstA.F.McCormackJ.P. & WestE.N. (1987). Investigation of a lead-lag relationship between spot stock indices and their futures contracts. Journal of Futures Markets, 7(4), 373–381.
20.
IyerV. & PillaiA. (2010). Price discovery and convergence in the Indian commodities market. Indian Growth and Development Review, 3(1), 53–61.
21.
JohansenS. (1988). Statistical analysis of cointegration vectors. Journal of Economic Dynamics and Control, 12(2), 231–254.
22.
JohansenS. (1991). Estimation and hypothesis testing of cointegration vectors in Gaussian vector autoregressive models. Econometrica: Journal of the Econometric Society, 59(6), 1551–1580.
23.
JohansenS. & JuseliusK. (1990). Maximum likelihood estimation and inference on cointegration—with applications to the demand for money. Oxford Bulletin of Economics and Statistics, 52(2), 169–210.
24.
KarandeK. (2006). A study of castor seed futures market in India (Doctoral thesis). Mumbai, India: Indira Gandhi Institute of Development Research.
25.
KawallerI.G.KochP.D. & KochT.W. (1987). The temporal price relationship between S&P 500 futures and the S&P 500 index. The Journal of Finance, 42(5), 1309–1329.
26.
KimM.SzakmaryA.C. & SchwarzT.V. (1999). Trading costs and price discovery across stock index futures and cash markets. Journal of Futures Markets, 19(4), 475–498.
27.
KofiT. (1973). A framework for comparing the efficiency of futures market. America Journal of Agricultural Economic, 55(4), 584–594.
28.
KrehbielT. & AdkinsL.C. (1993). Cointegration tests of the unbiased expectations hypothesis in metals markets. Journal of Futures Markets, 13(7), 753–763.
29.
KumarB. & PandeyA. (2013). Market efficiency in Indian commodity futures markets. Journal of Indian Business Research, 5(2), 101–121.
30.
KumarP. & SeppiD.J. (1994). Information and index arbitrage. Journal of Business, 67(4), 481–509.
31.
LaiK.S. & LaiM. (1991). A cointegration test for market efficiency. Journal of Futures Markets, 11(5), 567–575.
32.
LeathM.N. & GarciaP. (1983). The efficiency of the corn futures market in establishing forward prices. North Central Journal of Agricultural Economics, 5(2), 91–101.
33.
LeutholdR.M. (1974). The price performance on the futures market of a nonstorable commodity: Live beef cattle. American Journal of Agricultural Economics, 56(2), 271–279.
34.
LokareS.M. (2007). Commodity derivatives and price risk management: An empirical anecdote from India. Reserve Bank of India Occasional Papers, 28(2), 27–76.
35.
MattosF. & GarciaP. (2004, April). Price discovery in thinly traded markets: Cash and futures relationships in Brazilian agricultural futures markets. In Proceedings of the NCR-134 Conference on Applied Commodity Price Analysis, Forecasting and Risk Management. Retrieved from http://www.farmdoc.uiuc.edu/nccc134
NaikG. & JainS.K. (2002). Indian agricultural commodity futures markets: A performance survey. Economic & Political Weekly, 37(30), 3161–3173.
38.
NareshG.ThiyagarajanS.MahalakshmiS. & ShanthiP. (2013). Testing the nature of long and short run relationships between spot and future commodity prices in India. Prajnan, 42(2), 186–199.
39.
O’HaraM. (1995). Market microstructure theory (Vol. 108). Cambridge, MA: Blackwell.
40.
OellermannC.M.BrorsenB.W. & FarrisP.L. (1989). Price discovery for feeder cattle. Journal of Futures Markets, 9(2), 113–121.
41.
Osterwald-LenumM. (1992). A note with quantiles of the asymptotic distribution of the maximum likelihood cointegration rank test statistics. Oxford Bulletin of Economics and Statistics, 54(3), 461–472.
42.
PatiP.C. & PadhanP.C. (2009). Information, price discovery and causality in the Indian stock index futures market. IUP Journal of Financial Risk Management, 6(3–4), 7–21.
43.
PizziM.A.EconomopoulosA.J. & O’NeillH.M. (1998). An examination of the relationship between stock index cash and futures markets: A cointegration approach. Journal of Futures Markets, 18(3), 297–305.
44.
PraveenD.G. & SudhakarA. (2006). Price discovery and causality in the Indian derivatives market. ICFAI Journal of Derivatives Markets, 3(1), 22–29.
45.
RajuM.T. & KarandeK. (2003). Price discovery and volatility on NSE futures market. SEBI Bulletin, 1(3), 5–15.
46.
RoyA. & KumarB. (2007). A comprehensive assessment of wheat futures market: Myths and reality. Paper presented at the International Conference on Agri-business and Food Industry in Developing Countries: Opportunities and Challenges held at IIM, Lucknow.
47.
SahadevanK.G. (2002). Sagging agricultural commodity exchanges: Growth constraints and revival policy options. Economic & Political Weekly, 37(30), 3153–3160.
48.
SahooP. (2009). Efficiency and futures trading: Price nexus in Indian commodity futures markets. Global business Review, 10(2), 187–201.
49.
SchroederT.C. & GoodwinB.K. (1991). Price discovery and cointegration for live hog. Journal of Futures Markets, 11(6), 685–696.
50.
ShihabudheenM.T. & PadhiP. (2010). Price discovery and volatility spillover effect in Indian commodity market. Indian Journal of Agricultural Economics, 65(1), 101–117.
51.
StevensonR.A. & BearR.M. (1970). Commodity futures: Trends or random walks?The Journal of Finance, 25(1), 65–81.
52.
StollH.R. & WhaleyR.E. (1990). The dynamics of stock index and stock index futures returns. Journal of Financial and Quantitative Analysis, 25(4), 441–468.
53.
ThenmozhiM. & ThomasS.M. (2007). Price discovery and volatility spillover in spot and futures market: Evidence from India. Indian Journal of Capital Market, 4(2), 1–28.
54.
ThomasS. (2003). Agricultural commodity markets in India: Policy issues for growth. Derivatives Markets in India. Retrieved from http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.197.6692&rep=rep1&type=pdf
55.
ThomasS. & KarandeK. (2001). Price discovery across multiple spot and futures markets. IGIDR Finance Seminar Series. Retrieved 1June2015, from https://pdfs.semanticscholar.org/fe4e/81fb6d9213745e3012bcd31b784702998e4c.pdf
56.
TomekW.G. & GrayR.W. (1970). Temporal relationships among prices on commodity futures markets: Their allocative and stabilizing roles. American Journal of Agricultural Economics, 52(3), 372–380.
57.
TseY. (1999). Price discovery and volatility spillovers in the DJIA index and futures markets. Journal of Futures Markets, 19(8), 911–930.
58.
WangH.H. & KeB. (2005). Efficiency tests of agricultural commodity futures markets in China. Australian Journal of Agricultural and Resource Economics, 49(2), 125–141.
59.
YangJ.BesslerD.A. & LeathamD.J. (2001). Asset storability and price discovery in commodity futures markets: A new look. Journal of Futures Markets, 21(1), 279–300.
60.
ZhongM.DarratA.F. & OteroR. (2004). Price discovery and volatility spillovers in index futures markets: Some evidence from Mexico. Journal of Banking & Finance, 28(12), 3037–3054.
