Price discovery, transmission and volatility: evidence from agricultural commodity futures.

Abstract

This paper has examined the efficiency of futures trading in wheat, chickpea, maize and barley in terms of price transmission, price discovery and extent of volatility in prices. Wheat and barley have exhibited phenomenal growth coupled with high instability in futures trade quantity and value. Except for barley, futures and spot market prices have been found integrated. However, the level of integration, in terms of price transmission and long-run equilibrium, was most prominent in maize, followed by wheat and chickpea. Price discovery, one of the major benefits of futures trading, and the dominance of futures market in the process of price discovery have been clearly established. The study has indicated that futures are more efficient in price discovery of wheat and maize. Analysis of price volatility has revealed its persistence in spot prices though none of the selected commodities has exhibited an ‘explosive’ pattern. Further, the study has identified that farmers are not able to participate in the futures market owing to the small-scale production system prevailing in India.