Market Integration and Impact of Futures Derivative Trading - Case of Indian Wheat Market

Abstract

In the literature of market efficiency market integration has been always an important dimension of investigation. Several investigations and research paper has been published in the area of assessment of long run and short run market integration for different economies and commodities. This paper attempts to not only the estimation of the market integration of Indian wheat spot market but also assesses the impact of Futures Trading on market integration. Results support the evidence of price disseminating role of wheat Futures Market. Especially, when the markets (consumption and production centers) are widespread and physical movement of commodity is not smooth (inter-state movement restrictions, poor transportation and storage infrastructure), futures trading helps significantly in improvement of the market risk. The most interesting finding of this work is the evidence of improvement in the inter-state market integration during the post national commodity exchange era. It confirms that common price dissemination across spot markets was better through Futures Trading and spot prices quoted at exchanges. Overall, Indian wheat market has been found spatially well integrated during the Futures Trading era and it suggests for reduction in government’s intervention related to pricing, movement and trading.