Impact of Derivatives on Spot Market Volatility : A Case of Indian Agriculture Commodity

Abstract

In this research study, an attempt has been made to validate the market perceptions of different bodies on the usefulness and suitability of futures contract in developing the underlying agricultural commodity market in agricultural based Indian economy. The daily price information in spot and futures markets, for a period of 10 years (2004 - 2014), for 7 major agricultural commodities is extracted from NCDEX data base and incorporated into various econometric models, such as ADF Test, GARCH model, Dunkin Watson Statistic etc., to test the concerned objective. The effect of commodity futures trading in stabilizing the underlying agricultural commodity market for 7 major commodities, taken from different categories (Spices, Pulses, Oil and Oil Seeds) of Agri-products, are examined to throw some light on the rising inflation in Indian agricultural sector. Like other studies undertaken in world on Indian commodity market, the present study has also exhibited that even though the inflationary pressure on commodity, especially agricultural commodity, prices have gone up sharply after the introduction of commodity futures contracts, the destabilizing effect of the futures contract is casual in nature and tends to vary over a long period of time. The empirical findings significantly shows that comparative advantage of futures market in disseminating information, leading to a significant price discovery and risk management, can help to successfully develop the underlying commodity market in India.