Market efficiency in Indian commodity futures markets

B. Rajesh Kumar · Ajay Pandey

37 citations0/0 files storedJournal of Indian Business Research

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Financial Markets and Investment Strategies Financial Risk and Volatility Modeling Market Dynamics and Volatility

Abstract

Purpose In this paper, the authors aim to investigate the short‐run as well as long‐run market efficiency of Indian commodity futures markets using different asset pricing models. Four agricultural (soybean, corn, castor seed and guar seed) and seven non‐agricultural (gold, silver, aluminium, copper, zinc, crude oil and natural gas) commodities have been tested for market efficiency and unbiasedness. Design/methodology/approach The long‐run market efficiency and unbiasedness is tested using Johansen cointegration procedure while allowing for constant risk premium. Short‐run price dynamics is investigated with constant and time varying risk premium. Short‐run price dynamics with constant risk premium is modeled with ECM model and short‐run price dynamics with time varying risk premium is modeled using ECM‐GARCH in‐Mean framework. Findings As far as long‐run efficiency is concerned, the authors find that near month futures prices of most of the commodities are cointegrated with the spot prices. The cointegration relationship is not found for the next to near months futures contracts, where futures trading volume is low. The authors find support for the hypothesis that thinly traded contracts fail to forecast future spot prices and are inefficient. The unbiasedness hypothesis is rejected for most of the commodities. It is also found that for all commodities, some inefficiency exists in the short run. The authors do not find support of time varying risk premium in Indian commodity market context. Originality/value In context of Indian commodity futures markets, probably this is the first study which explores the short‐run market efficiency of futures markets in time varying risk premium framework. This paper also links trading activity of Indian commodity futures markets with market efficiency.

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References

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