PERFORMANCE ASSESSMENT OF AGRICULTURAL FUTURES MARKETS IN INDIA. JATINDER BIR SINGH NCDEX Institute of Commodity Markets and Research (NICR ). Need for study???. Almost three and half years of futures trading in agricultural commodities
JATINDER BIR SINGH
NCDEX Institute of Commodity Markets and Research (NICR)
Return to short hedger=X(B2-B1)
Convergence of SP and FP at maturity of contract
Bt= + B1t+ t
Regress change in basis (B2-B1) on initial basis (B1)—slope=-1, intercept=0
Initial basis (B1) =basis immediately after the expiry of preceding contracts
Final basis(B2) =1st trading day of expiration month and delivery day
Ft+i = + Ft+ t+i
where Ft is forecast and Ft+i is actual price realization
Ft+i- Ft = + (-1)Ft+ t+i
where i can be maturity or can be before maturity. This is forecast evaluation tool.
Week-form efficiency: = -1=0
Current price is the best estimate of coming price and has no ability to forecast prices.
Pt+i- Pt = + (Ft-Pt )+ t+i (1)
or Pt+i= + Ft-Pt + t+i (2)
The evaluation eqn.(2) have large R2 but may have little or no ability to forecast price change. Same with basis equation (1)
If Jeera actual December 2007 prices are underestimated by October futures Prices, doesn’t mean market is inefficient.
Mit =( (pitj –p itj-1)2 / nit )1/2
where Mit is the volatility of month i in year t (monthly volatility of weekly changes), nit are number of the weeks in month i in year t and pitj is the price in week j in month i in year t.
where pit is average monthly price.
+ cj*(D* djt) +
wheredjaremonthly dummy variables, where j=1,2,3,………11 denote the eleven dummies for 12 months of the season. D* stand for the dummy for the period 2004-2007.
Use model selection criteria-AIC, SBC
We can also look at intertemporal price relationships to know the effects of futures markets on allocating inventories with in a year.
Improvements- We can use time varying volatility; changing the length of estimation window. Can use rolling estimation-extending estimation by one period. To take time-dependence we use exponentially weighted volatility estimates.