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- Title
Influence of Commodity Derivatives on Volatility of Underlying Asset.
- Authors
Sahi, Gurpreet Singh
- Abstract
This paper studies the impact of introducing commodity futures contracts on the volatility of the underlying commodity, in the Indian context. Empirical methods, namely, GARCHX, Granger causality, and forecast error variance decomposition are used to examine the validity of one of the recurring arguments made against futures markets, that they give rise to price instability. Empirical evidence from GARCHX methods suggests that in wheat, turmeric, sugar, cotton, raw jute and soybean oil, the nature of spot price volatility has not changed with the onset of futures trading. However, in wheat and raw jute, there has been a weak destabilizing effect from futures to the spot with the onset of futures trading. Granger causality tests show that an unexpected increase in futures trading volume unidirectionally causes an increase in cash price volatility for wheat, turmeric, sugar, raw jute and soybean oil. Likewise, there is a causal effect from unexpected increase in open interest to cash price volatility for wheat, turmeric, raw jute and soybean oil. These findings are in line with researches done elsewhere that state that futures trading has a destabilizing effect on agricultural commodities.
- Publication
ICFAI Journal of Derivatives Markets, 2007, Vol 4, Issue 3, p26
- ISSN
0972-9119
- Publication type
Academic Journal