Commodity Derivative Market and its Impact on Spot Market

Abstract

Nation wide trading in commodities futures in India was introduced for many agricultural commodities and later trading in futures was banned for few commodities due to pressure on spot prices of these commodities. The paper studies the impact of futures trading in three important commodities which were banned by the government from trading in futures and their impact on spot prices. The study uses simple linear regressions, correlations, Granger Causality tests to find the answer. The study also tries to find if the seasonal/cyclical fluctuations in these commodities prices have been affected by the introduction of futures in those commodities. Hodrick-Prescott filter is used to differentiate the general trend and seasonal/cyclical fluctuations in prices. The study finds that in India future trading in the selected commodities had apparently led to increase in prices of commodities like urad. It also increased the volatilities in the spot market.