Impact of COVID-19 trade suspension on price discovery in FPO-traded agri-derivatives

Abstract

Purpose This study aims to examine whether agricultural commodities exhibited deviations in the lead-lag relationship between future and spot prices of farmer producer organizations (FPOs) traded commodities in the Indian derivative market after trade suspensions during Covid-19. The study may help buyers and sellers to get a fair price for their commodities after lockdown-trade disruptions. Design/methodology/approach The study applied the Granger causality (GC) test and the vector error correction model (VECM) to analyse short-run and long-run lead-lag relationships. Moreover, the study examined the pre-post-trade suspension effect on the lead-lag relationship of commodity prices. Findings The GC test results show that five out of the 13 agri-commodities have changed their lead-lag relationship from future to spot in the short run. Simultaneously, VECM captured changes in the lead-lag relationship for the same five commodities in the long run due to trade suspensions. Practical implications The findings indicate a reverse lead-lag relationship between future and spot prices for aforesaid commodities after trade suspension. The stakeholders may use the lead prices for these commodities to perform a fair trade. The study may be helpful in structuring price discovery strategy to achieve optimal price and efficient derivative trading. Originality/value To the best of the authors’ knowledge, this is the first study examining the effects of trade suspension on price discovery in FPO-traded agri-derivatives caused by the COVID-19 pandemic.