International Linkages of the Indian Commodity Futures Markets
Brajesh Kumar, Ajay Pandey
DOI: 10.4236/me.2011.23027   PDF    HTML     13,888 Downloads   28,661 Views   Citations


This paper investigates the cross market linkages of Indian commodity futures for nine commodities with futures markets outside India. These commodities range from highly tradable commodities to less tradable agricultural commodities. We analyze the cross market linkages in terms of return and volatility spillovers. The nine commodities consist of two agricultural commodities: Soybean, and Corn, three metals: Aluminum, Copper and Zinc, two precious metals: Gold and Silver, and two energy commodities: Crude oil and Natural gas. Return spillover is investigated through Johansen’s cointegration test, error correction model, Granger causality test and variance decomposition techniques. We apply Bivariate GARCH model (BEKK) to investtigate volatility spillover between India and other World markets. We find that futures prices of agricultural commodities traded at National Commodity Derivatives Exchange, India (NCDEX) and Chicago Board of Trade (CBOT), prices of precious metals traded at Multi Commodity Exchange, India (MCX) and NYMEX, prices of industrial metals traded at MCX and the London Metal Exchange (LME) and prices of energy commodities traded at MCX and NYMEX are cointegrated. In case of commodities, it is found that world markets have bigger (unidirectional) impact on Indian markets. In bivariate model, we found bi-directional return spillover between MCX and LME markets. However, effect of LME on MCX is stronger than the effect of MCX on LME. Results of return and volatility spillovers indicate that the Indian commodity futures markets function as a satellite market and assimilate information from the world market.

Share and Cite:

B. Kumar and A. Pandey, "International Linkages of the Indian Commodity Futures Markets," Modern Economy, Vol. 2 No. 3, 2011, pp. 213-227. doi: 10.4236/me.2011.23027.

Conflicts of Interest

The authors declare no conflicts of interest.


[1] H. Working, “New Concepts Concerning Futures Markets and Prices,” American Economic Review, Vol. 52, 1962.
[2] W. Silber, “Innovation, Competition, and New Contract Design in Futures Markets,” Journal of Futures Markets, Vol. 2, 1981
[3] I. G. Kawaller, P. Koch and T. Koch, “The Temporal Price Relationship between S&P 500 Futures and the S&P 500 Index,” Journal of Finance, Vol. 42, No. 5, 1987, pp. 1309-1329. doi:10.2307/2328529
[4] H. R. Stoll and R. E. Whaley, “The Dynamics of Stock Index and Stock Index Futures Returns,” Journal of Financial and Quantitative Analysis, Vol. 25, No. 4, 1990, pp. 441-468. doi:10.2307/2331010
[5] J. A. Stephan and R. E. Whaley, “Intraday Price Change and Trading Volume Relations in the Stock and Stock Option Markets,” Journal of Finance, Vol. 45, No. 1, 1990, pp. 191-220. doi:10.2307/2328816
[6] K. Chan, “A Further Analysis of the Lead-Lag Relationship between the Cash Market and Stock Index Futures Market,” Review of Financial Studies, Vol. 5, No. 1, 1992, pp. 123-152. doi:10.1093/rfs/5.1.123
[7] M. A. Pizzi, A. J. Economopoulos and H. M. O’Neil, “An Examination of the Relationship between Stock Index Cash and Futures Markets: A Cointegration Approach,” The Journal of Futures Markets, Vol. 18, No. 3, 1998, pp. 297-305. doi:10.1002/(SICI)1096-9934(199805)18:3<297::AID-FUT4>3.0.CO;2-3
[8] G. G. Booth and C. Ciner, “International Trans-Mission of Information in Corn Futures Markets,” Journal of Multinational Financial Management, Vol. 7, No. 3, 1997, pp. 175-187. doi:10.1016/S1042-444X(97)00012-1
[9] F. Pattarin and R. Ferretti, “The Mib30 Index and Futures Relationship: Economic Analysis and Implications for Hedging,” Applied Financial Economics, Vol. 14, No. 18, 2004, pp. 1281-1289. doi:10.1080/09603100412331313578
[10] H.-J. Ryoo and G. Smith, “The Impact of Stock Index Futures on the Korean Stock Market,” Applied Financial Economics, Vol. 14, No. 4, 2004, pp. 243-251. doi:10.1080/0960310042000201183
[11] D. G. MacMillan, “Cointegrating Behaviour between Spot and forward Exchange Rates,” Applied Financial Economics, Vol. 15, No. 6, 2005, pp. 1135-1144. doi:10.1080/09603100500359476
[12] T. Fortenbery and H. Zapata, “An Evaluation of Price Linkages between Futures and Cash Markets for Cheddar Cheese,” Journal of Futures Markets, Vol. 17, No. 3, 1997, pp. 279-301. doi:10.1002/(SICI)1096-9934(199705)17:3<279::AID-FUT2>3.0.CO;2-F
[13] P. Silvapulle and I. Moosa, “The Relationahip between Spot and Futures Prices: Evidence from the Crude Oil Market,” Journal of Futures Markets, Vol. 19, No. 2, 1999, pp. 175-193. doi:10.1002/(SICI)1096-9934(199904)19:2<175::AID-FUT3>3.0.CO;2-H
[14] I. Moosa, “Price Discovery and Risk Transfer in the Crude Oil Futures Market: Some Structural Time Series Evidence,” Economic Notes by Banca Monte dei Paschi di Siena SpA 31, 2002, pp. 155-165.
[15] I. Figuerola-Ferretti and C. Gilbert, “Price Discovery in the Aluminium Market,” Journal of Futures Markets, Vol. 25, No. 10, 2005, pp. 967-988. doi:10.1002/fut.20173
[16] J. Yang, R. B. Balyeat and D. J. Leatham, “Futures Trading Activity and Commodity Cash Price Volatility,” Journal of Business Finance and Accounting, Vol. 32, No. 1-2, 2005, pp. 297-323. doi:10.1111/j.0306-686X.2005.00595.x
[17] K. N. Kabra, “Commodity Futures in India,” Economic and Political Weekly, 31 March 2007, pp. 1163-1170.
[18] B. P. Pashigian, “The Political Economy of Futures Market Regulation,” Journal of Business, Vol. 59, No. 2, 1986, pp. 55-84. doi:10.1086/296339
[19] R. D. Weaver and A. Banerjee, “Does Futures Trading Destabilize Cash Prices? Evidence for US Live Beef Cattle,” Journal of Futures Markets, Vol. 10, No. 1, 1990, pp. 41-60. doi:10.1002/fut.3990100105
[20] S. Thomas, “Agricultural Commodity Markets in India: Policy Issues for Growth,” Mimeo, Indira Gandhi Institute for Development Research, Mumbai, India, 2003.
[21] D. S. Kolamkar, “Regulation and Policy Issues for Commodity Derivatives in India,” 2003. , Accessed on 20, January, 2009.
[22] C. K. G. Nair, “Commodity Futures Markets in India: Ready for “Take-Off”?” NSE News, July 2004.
[23] S. Thomas and K. Karande, “Price Discovery across Multiple Spot and Futures Markets,” 2002.
[24] K. G. Sahadevan, “Sagging Agricultural Commodity Exchanges: Growth Constraints and Revival Policy Options,” Economic and Political Weekly, Vol. 37, No. 30, 2002, pp. 3153-3160.
[25] G. Naik and S. K. Jain, “Indian Agricultural Commodity Futures Markets: A Performance Survey,” Economic and Political Weekly, Vol. 37, No. 30, 2002, pp. 3161-3173.
[26] A. Roy and B. Kumar, “A Comprehensive Assessment of Wheat Futures Market: Myths and Reality,” Paper presented at International Conference on Agribusiness and Food Industry in Developing Countries: Opportunities and Challenges, held at IIM Lucknow, 10-12 August 2007.
[27] C. S. Eun and S. Shim, “International Transmission of Stock Market Movements,” Journal of Financial and Quantitative Analysis, Vol. 24, No. 2, 1989, pp. 241-256. doi:10.2307/2330774
[28] M. King and S. Wadhwani, “Transmission of Volatility between Stock Markets,” Review of Financial Studies, Vol. 3, No. 1, 1990, pp. 5-33. doi:10.1093/rfs/3.1.5
[29] R. Susmel and R. F. Engle, “Hourly Volatility Spill overs between International Equity Markets,” Journal of International Money and Finance, Vol. 13, No. 1, 1994, pp. 3- 25. doi:10.1016/0261-5606(94)90021-3
[30] G. Koutmos and G. G.Booth, “Asymmetric Volatility Transmission in International Stock Markets,” Journal of International Money and Finance, Vol. 14, No. 6, 1995, pp. 747-762. doi:10.1016/0261-5606(95)00031-3
[31] G. G.Booth, T. H. Lee and Y. Tse, “International Linkages in the Nikkei Stock Index Futures Markets,” Pacific Basin Finance Journal, Vol. 4, No. 1, 1996, pp. 59-76. doi:10.1016/0927-538X(95)00023-E
[32] G. G. Booth, P. Brockman and Y. Tse, “The Relationship between US and Canadian Wheat Futures,” Applied Financial Economics, Vol. 8, No. 1, 1998, pp. 73-80. doi:10.1080/096031098333276
[33] Y. Tse, “International Linkages in Euromark Futures Markets: Information Transmission and Market Integration,” Journal of Futures Markets, Vol. 18, No. 2, 1998, pp. 129-149. doi:10.1002/(SICI)1096-9934(199804)18:2<129::AID-FUT1>3.0.CO;2-K
[34] H. G.Fung, W. K.Leung and X. E. Xu, “Information Role of US Futures Trading in a Global Financial Market,” Journal of Futures Markets, Vol. 21, No. 11, 2001, pp. 1071-1090. doi:10.1002/fut.2105
[35] G. G. Booth and C. Ciner, “International Trans-Mission of Information in Corn Futures Markets,” Journal of Multinational Financial Management, Vol. 7, No. 3, 1997, pp. 175-187. doi:10.1016/S1042-444X(97)00012-1
[36] A. H. W. Low, J. Muthuswamy and R. I. Webb, “Arbitrage, Cointegration, and the Joint Dynamics of Prices across Commodity Futures Auctions,” The Journal of Futures Markets, Vol. 19, No. 7, 1999, pp. 799-815. doi:10.1002/(SICI)1096-9934(199910)19:7<799::AID-FUT4>3.0.CO;2-5
[37] S. X. Lin and M. M. Tamvakis, “Spillover Effects in Energy Futures Markets,” Energy Economics, Vol. 23, No. 1, 2001, pp. 43-56. doi:10.1016/S0140-9883(00)00051-7
[38] M. E. Holder, R. D. Pace and M. J. Tomas III, “Complements or Substitutes? Equivalent Futures Contract Markets—The Case of Corn and Soybean Futures on US and Japanese Exchanges,” The Journal of Futures Markets, Vol. 22, No. 4, 2002, pp. 355-370. doi:10.1002/fut.10009
[39] X. E. Xu, , H. G. Fung, “Cross-Market Linkages between US and Japanese Precious Metals Futures Trading,” International Finance Markets, Institution and Money, Vol. 15, No. 2, 2005, pp. 107-124. doi:10.1016/j.intfin.2004.03.002
[40] C. W. Kao and J. Y. Wan, “Information Transmission and Market Interactions across the Atlantic―An Empirical Study on the Natural Gas Market,” Energy Economics, Vol. 31, No. 1, 2009, pp. 152-161. doi:10.1016/j.eneco.2008.07.007
[41] H. G. Fung, W. K. Leung and X. E. Xu, “Information Flows between the US and China Commodity Futures Trading,” Review of Quantitative Finance and Accounting, Vol. 21, No. 3, 2003, pp. 267-285. doi:10.1023/A:1027384330827
[42] R. Hua and B. Chen, “International Linkages of the Chinese Futures Markets,” Applied Financial Economics, Vol. 17, No. 6, 2007, pp. 1275-1287. doi:10.1080/09603100600735302
[43] Y. Ge, H. H. Wang and S. K. Ahn, “Implication of Cotton Price Behavior on Market Integration,” Proceedings of the NCCC-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management, St. Louis, 2008.
[44] W. G. Tomek, “Price Behavior on a Declining Terminal market,” American Journal of Agricultural Economics, Vol. 62, No. 3, 1980, pp. 434-445. doi:10.2307/1240198
[45] C. A. Carter, “Arbitrage Opportunities between Thin and Liquid Futures Markets,” The Journal of Futures Markets, Vol. 9, No. 4, 1989, pp. 347-353. doi:10.1002/fut.3990090408
[46] R. F. Engle and C. W. J. Granger, “Co-integration and Error Correction: Representation, Estimation and Test- ing,” Econometrica, Vol. 55, No. 2, 1987, pp. 251-276. doi:10.2307/1913236
[47] S. Johansen, “Estimation and Hypothesis Testing of Co- integration Vectors in Gaussian Vector Autoregressive Models,” Econometrica, Vol. 59, No. 6, 1991, pp. 1551- 1580. doi:10.2307/2938278
[48] S. Johansen and K. Juselius, “Maximum Likelihood Estimation and Inference on Cointegration with Applica- tions to the Demand for Money,” Oxford Bulletin of Eco- nomics and Statistics, Vol. 52, No. 2, 1990, pp. 169-210. doi:10.1111/j.1468-0084.1990.mp52002003.x Ghosh, Saidi and Johnson, 1999
[49] F. H. Harris, T. H. McInish, G. L. Shoesmith and R. A. Wood, “Cointegration, Error Correction, and Price Discovery on Informationally Linked Security Markets,” Journal of Financial and Quantitative Analysis, Vol. 30, No. 4, 1995, pp. 563-579. doi:10.2307/2331277
[50] Y. W. Cheung and. H. G. Fung, “Information Flows between Eurodollar Spot and Futures Markets,” Multinational Finance Journal, Vol. 1, No. 4, 1997, pp. 255-271.
[51] A. Ghosh, R. Saidi and K. H. Johnson, “Who Moves the Asia-Pacific Stock Markets―US or Japan? Empirical Evidence Based on the Theory of Cointegration,” Financial Review, Vol. 34, No. 1, 1999, pp. 159-170. doi:10.1111/j.1540-6288.1999.tb00450.x
[52] C. Sims, “Money, Income, and Causality,” American Economic Review, Vol. 62, 1972, pp. 540-552.
[53] C. Sims, “Macroeconomics and Reality,” Econometrica, Vol. 48, No. 1, 1980, pp. 1-48. doi:10.2307/1912017
[54] D. A. Abdullah and P. C. Rangazas, “Money and the Business Cycle: Another Look,” Review of Economics and Statistics, Vol. 70, No. 4, 1988, pp. 680-685. doi:10.2307/1935833
[55] S. A. Ross, “Information and Volatility: The No-Arbi- trage Martingale Approach to Timing and Resolution Irrelevancy,” Journal of Finance, Vol. 44, No. 1, 1989, pp. 1-17. doi:10.2307/2328272
[56] R. F. Engle, T. Ito and W. L. Lin, “Metero Showers or Heat Waves? Heteroskedastic Intra-Daily Volatility in the Foreign Exchange Market,” Econometric, Vol. 58, No. 3, 1990, pp. 525-542 . doi:10.2307/2938189
[57] Y. Tse, “Price Discovery and Volatility Spillovers in the DJIA Index and Futures Market,” Journal of Futures markets, Vol. 19, No. 8, 1999, pp. 911-930. doi:10.1002/(SICI)1096-9934(199912)19:8<911::AID-FUT4>3.0.CO;2-Q
[58] R. F. Engle and V. K. Ng, “Time-Varying Volatility and the Dynamic Behavior of the Term Structure,” Journal of Money, Credit and Banking, Vol. 25, No. 3, 1993, pp. 336-349. doi:10.2307/2077766
[59] K. F. Kroner and V. K. Ng, “Modeling Asymmetric Comovements of Asset Returns,” Review of Financial Studies, Vol. 11, No. 4, 1998, pp. 817-844. doi:10.1093/rfs/11.4.817
[60] R. W. So and Y. Tse, “Price Discovery in the Hang Seng Index Markets: Index, Futures, and the Tracker Fund,” Journal of Futures Markets, Vol. 24, No. 9. 2004, pp. 887-907. doi:10.1002/fut.20112

Copyright © 2024 by authors and Scientific Research Publishing Inc.

Creative Commons License

This work and the related PDF file are licensed under a Creative Commons Attribution 4.0 International License.