Abstract
Futures trading is one of the oldest methods of trading and investing in commodities. History of commodities futures trading in India is interrupted, flabbergasted and disrupted unlike commodities future trading in Chicago Mercantile Exchange (CME), Chicago Board of Trade (CBOT), or London Metal Exchange (LME) where futures trading has been taking place uninterrupted for over a century. Prohibiting of futures trading in India in a large part of the last few decades has ensured research on commodities trading in India is still at an embryonic stage. In this study, we model Commodity prices of select Agriculture (Barley, Jeera, Sugar, and Pepper), Metal (Aluminium, Copper, Lead, and Gold), and Energy commodities (Crude Oil) in Indian Commodity Markets. Data during the Super-cycle period of commodities in India from 2003 to 2013 is used for the study and modeled using the state-space specification. The results of the study suggest that state-space specification and Kalman filter provides preeminent estimates for modeling and forecasting Indian commodity prices during the Super-cycle period. The results of the study provide crucial insights for pension funds, alternate investment funds, hedge funds and sovereign wealth funds worldwide to strategize better in the next expected super-cycle period of commodities post Covid-19 with burgeoning demand from developing economies of Asia and Africa.
Highlights
Trading of Commodities in India can be traced back 2500 years ago as stated in Kautilya's Arthashastra book of Economics written by Chanakya in the Sanskrit language who was the teacher to the founder of the Mauryan empire between 322 and 185 BC
Studies in literature point out that participants of developed markets have deciphered commodity price dynamics better owing to data availability on uninterrupted futures trading in exchanges such as the Chicago Mercantile Exchange (CME), Chicago Board of Trade (CBOT) or London Metal Exchange (LME) for over a century
Commodity markets in India over the decades have encountered bottlenecks for market microstructure, restrictions on the free movement of commodities in various States/Provinces of the country, the actuality of market imperfections such as Minimum Support Price (MSP) for essential commodities as announced by the Government, superfluous political interloping and infrastructure concerns related to derisory warehousing facilities to name a few
Summary
Trading of Commodities in India can be traced back 2500 years ago as stated in Kautilya's Arthashastra book of Economics written by Chanakya in the Sanskrit language who was the teacher to the founder of the Mauryan empire between 322 and 185 BC. The evolution of modern-day commodity derivative markets in India can be traced back to the 17th century. Commodity exchanges in India have evolved with a large number of regional exchanges designed and established during the period of first and second world wars in different parts of the country. Trading was shepherded both in options and futures back nonexistence of a Central Regulator for commodities handicapped the system plaguing the system with clearing and settlement woes for the participants of these exchanges. Studies in literature point out that participants of developed markets have deciphered commodity price dynamics better owing to data availability on uninterrupted futures trading in exchanges such as the Chicago Mercantile Exchange (CME), Chicago Board of Trade (CBOT) or London Metal Exchange (LME) for over a century. Though commodity futures trading commenced in a similar time frame in India, structural bottlenecks and lack of a central regulator coupled with prohibiting of futures trading in www.cribfb.com/journal/index.php/ijafr
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