Price discovery is one of the imperative functions of commodity derivative market. Its mechanism is established by long run and causal relationship between two variables. The present treatise is an attempt to examine the price discovery mechanism of commodity market in India. This paper evaluates the performance of Multiple Commodity Exchange in price discovery by statistically testing the cointegration and causality between future prices and spot prices of two precious metals i.e. gold and silver. The results of Johansen cointegration test indicate that cointegration exists between spot prices and future prices of gold and silver. Vector error correction mechanism confirms the presence of feedback relationship between spot and future market in case of gold and silver. There is bidirectional causality between future returns and spot returns. However, stronger causal relation from future market to spot market exists as compared to spot market to future market for gold as well as silver.
Price Discovery Via Long Run Causality of Future and Spot Prices in Commodity Market in India
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Published 2013-04-30
Pages 44-54
Abstract
Keywords
Causality
cointegration
price discovery
stationarity and vector error correction mechanism
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