The Commodity Futures Volatility and Macroeconomic Fundamentals - The Case of Oil and Oilseed Commodities in India

Abstract

Food price inflation results in uncertainty in the food markets and reduces real income asfood covers a relatively large share of the households’ expenditures in the LDCs. As priceof food commodities are primarily governed by the underlying demand and supplyconditions, we have analyzed the association of futures price volatility with the underlyingmacroeconomic variables. A strong association of futures price volatility with theunderlying macro variables will imply that futures market operates based on theimplications of the macroeconomic policies and are not merely driven by speculativemotive. The association between futures price and the macroeconomic variables will helpin developing policies aimed at stabilizing food prices. For our study we have consideredthe five major oil and oilseed contracts traded on National Commodity and DerivativesExchange. We have considered the nearest three month contracts traded on the exchange.In our study we observe that Gross Domestic Product (GDP) and Index of IndustrialProduction (IIP) growth rate have significant impact on futures price volatility. We havealso found a significant relation between futures price volatility and inflation. Thesefindings have important implications for commodity production decision making,commodity hedging and commodity price forecasting.