Abstract
The purpose of this study is to quantify the price discovery relationship between spot and futures prices of four Indian commodity indices, namely, combined commodity index, metal index, energy index, and agriculture index by employing common factor models. The sample consists of daily closing prices for the period from Oct 21, 2005 to May 29, 2015. Vector error correction model is estimated after conventional stationarity and cointegration tests. Spot and futures prices of all indices are found to be cointegrated except agriculture index which is therefore dropped for price discovery analysis. Results suggest that price discovery takes place in spot market for combined commodity index and metal index, whereas for energy index, price discovery occurs in futures market. This study will help market participants to draw a conclusion about relative efficiency of spot and futures market. This is the first study, to best of knowledge, which is using common factor models to analyse price discovery process in Indian commodity indices.
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