A Study of Castorseed Futures Market in India
Symbiosis Center for Management & Human Resource Development
In this thesis, we examine commodity futures markets in India. We study three aspects of futures market viz. basis risk, price discovery and spot price volatility. Specifically, we examine the castorseed futures market at Mumbai and Ahmedabad with respect to the above three aspects. We study the castorseed futures market since inception (May 1985) up to August 1999.
We investigate the nature of basis risk for different contracts for the castorseed futures market. We use root mean squared error (RMSE) to measure basis risk. The test developed by Ashley, Granger and Schmalensee is used to compare RMSE. We also use the Henrikson-Merton (H-M) timing test to gauge the qualitative accuracy of forecast. The results show that the time series model performs better (lower RMSE and superior timing ability) than the benchmark model. RMSE is low for June contract and high for December contract. The forecast for the Mumbai market has higher RMSE but better timing ability as compared to forecast for Ahmedabad market. The link between liquidity and basis risk is unclear. If the lower RMSE for Ahmedabad market is due to higher futures trading volume; the H-M timing test does not indicate superior timing ability.
Usually, price discovery is studied in a futures market and its corresponding spot market. We term this as price discovery 'within' market. However, in India two futures markets exist for castorseed at Mumbai and Ahmedabad. This gives us an opportunity to study price discovery 'across' markets by designating one of the futures market, say at Mumbai, as the futures market and the other futures market, at Ahmedabad, as the spot market. The results show that the futures and spot market at Mumbai and Ahmedabad as well as the futures market at Mumbai and Ahmedabad are mostly cointegrated. There is causality and information flow from futures to spot market at both Mumbai and Ahmedabad. There is reverse information flow as well for some contracts and periods. Results are different for various markets, contracts and time periods indicating the role played by geographical location, harvest and futures trading volume in influencing price discovery.
We study the impact of castorseed futures market on spot price volatility for castorseed in India. We study the market at both Mumbai and Ahmedabad which allows us to compare results across markets and gives us additional insight into the influence of futures trading on the underlying spot market. We use both the traditional regression technique as well as GARCH analysis. The results show that the introduction of castorseed futures market at Mumbai and Ahmedabad has had a beneficial effect on the castorseed spot market in the futures early period. This effect has remained stable in the futures later period, a possible reason being the rise in futures trading volume post 1994 at Ahmedabad.
Number of Pages in PDF File: 80
Keywords: Basis risk, Castorseed, Cointegration, Commodity futures, Derivatives, Forecasting, GARCH, India, Price discovery, Volatility
JEL Classification: G13working papers series
Date posted: April 30, 2007
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