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An Enquiry into Efficiency of Futures Trading in Agricultural Commodities in India. Ashwini Kumar, IES Ministry of Agriculture. Economics of Futures Trading. Objectives Price discovery Hedge against risk Trade facilitation Heterogeneity of firms’ behaviour Zero-sum nature

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an enquiry into efficiency of futures trading in agricultural commodities in india

An Enquiry into Efficiency of Futures Trading in Agricultural Commodities in India

Ashwini Kumar, IES

Ministry of Agriculture

economics of futures trading
Economics of Futures Trading
  • Objectives
    • Price discovery
    • Hedge against risk
    • Trade facilitation
  • Heterogeneity of firms’ behaviour
  • Zero-sum nature
    • Representative individual?
perspectives
Perspectives
  • Risk Management Perspective
    • Interaction between hedgers ( risk avert) and risk premium earners
  • Transaction cost / Arbitrage Perspective
    • Firms benefit from arbitrage because of their better position in terms of transaction cost.
    • Speculators?
      • Contribute to liquidity and forecasting ability.
commodity futures markets in india
Commodity Futures Markets in India
  • Indian Agriculture
    • Prominent sector
      • Source of livelihood for majority
    • Susceptible to weather fluctuations
    • Fragmented Agricultural Markets
    • Inequality in distributional benefits
commodity futures markets in india1
Commodity Futures Markets in India
  • Long History
    • Reference in Kautilya’s Arthashastra
    • Several forward markets/ Satta in late 19th-early 20th century
      • Cotton Trade Association, Bombay, 1875
    • Specialised in trading of a particular commodity/ group of commodities
commodity futures markets in india2
Commodity Futures Markets in India
  • Independent India
    • Forward Contracts (Regulation) Act, 1952
    • Forward Makets Commission in 1953.
    • 1966- futures trade banned in all major agricultural commodities
    • 1980- Khusro Committee
    • 1993- Kabra Committee
      • Recommended forward trading in 17 commodity groups.
commodity futures markets in india3
Commodity Futures Markets in India
  • National Agricultural Policy, 2000.
    • Envisaged use of futures contracts.
  • Watershed year- 2003
    • Ban on futures trading of all commodities lifted.
    • 3 new Nation-wide multi-commodity exchanges, MCX, NCDEX & NMCE.
    • Electronic trading.
  • Phenomenal growth in turnover since 2003-04.
efficiency of futures markets
Efficiency of Futures Markets
  • Efficient market =>
    • Market prices reflect all informations
    • Nobody can earn excess profits in a systematic manner.
    • Random walk.
data and methodology
Data and Methodology
  • Two indices of NCDEX
    • NCDEXAGRI- index of spot prices
    • FUTEXAGRI- index of futures prices
    • Identical basket of commodities and same base.
    • FUTEXAGRI constructed on prices of the nearest month expiry contract.
    • Data from 01/Jan/2007 to 03/Oct/2007- 232days
      • Opening values of every day.
descriptive statistics

FUTEXAGRI

NCDEXAGRI

MEAN

1512.593

1513.816

MEDIAN

1489.600

1495.495

MAXIMUM

1651.560

1667.130

MINIMUM

1401.440

1411.980

STD DEV

63.48507

69.40974

SKEWNESS

0.397568

0.446115

KURTOSIS

2.007449

2.088885

Descriptive Statistics
econometric tests
Econometric tests
  • Tests for stationarity
    • Augmented Dickey Fuller (ADF) Test
    • Philips-Peron (PP) Test
  • Johansen’s Cointegration Test
  • Granger Causality Test
  • Impulse Response Function
findings
Findings
  • Unit Root tests
    • Both indices are not stationary in level form.
    • First Difference of log form, i.e., rates of growth series of these indices are stationary.
    • It implies that while it may not be possible to predict future values, the rate of growth of either of the two series is predictable.
findings contd
Findings Contd..
  • Johansen Cointegration test
    • Assuming Linear deterministic trend , and
    • Assuming no deterministic trend.
  • There are two cointegrating equations implying that rates of growth of the two indices have long-term relationship.
causality findings
Causality Findings
  • Granger Causality Test results imply
    • No causality in any direction
    • Rate of growth in futures prices do not depend on rate of growth in spot prices and similarly the other way round.
impulse response function
Impulse Response Function
  • Results imply that
    • Rate of growth of futures prices get affected by any exogenous shock in rate of growth in spot prices but not vice versa.
    • In case of an exogenous shock to rate of growth in spot prices futures prices take longer to stabilize than the spot prices themselves.
conclusions
Conclusions
  • Futures market not efficient in short run.
  • Change in spot prices are found to affect futures prices.
  • Effect of change in futures prices on spot prices is found to be minimal.
unit root tests results

Variables

Critical Values

ADF Statistic

PP Statistic

FUTEXAGRI

ADF

PP

Level Form

-1.28

-1.31

1%

-4.28

-4.27

Level form of Log

-1.13

-1.81

5%

-3.56

-3.55

10%

-3.21

-3.21

First Difference form of Log

-9.32

-14.12

NCDEXAGRI

Level Form

-1.47

-1.49

Level form of Log

-1.42

-1.44

First Difference form of Log

-8.54

-14.49

Unit Root Tests Results
johansen cointegration test result

Hypothesized No. of CE(s)

Hypothesized No. of CE(s)

Eigen value

Eigen value

Likelihood Ratio

Likelihood Ratio

5% Critical Value

5% Critical Value

1% Critical Value

1% Critical Value

None**

None**

0.223629

0.221714

96.15476

94.00665

12.53

15.41

20.04

16.31

At most 1**

At most 1**

0.158306

0.152359

38.94846

37.35732

3.76

3.84

6.51

6.65

Johansen cointegration test result
granger causality test result

Null Hypothesis:

Obs

F-Statistic

Probability

LN_NCDEX_101 does not Granger Cause LN_FUTEX_101

229

0.12940

0.87869

LN_FUTEX_101 does not Granger Cause LN_NCDEX_101

1.66731

0.19109

Granger Causality Test result