Mean Reversion and Persistence in Commodity Markets in India
Jindal Global Business School; IIM Ahmedabad
Indian Institute of Management (IIM), Ahmedabad
August 7, 2008
Using daily prices of both spot and three futures for seven commodities in India, mean reversion/randomness is investigated. The commodities under investigation are: castor seed, gold, guar seed, maize, silver, soybean and soyoil. Traditional unit root tests as well as robust Variance ratio test are applied to check for departure from randomness. Unit root tests suggest presence of randomness in all price series and stationarity in return series. However, upon applying Variance ratio test, it is found that non agricultural commodities, namely, gold and silver spot as well as all three futures price series are random. Among agricultural commodities, spot and three futures of castor seed show randomness but guar seed follow mean reversion for all price series. Maize spot price and soyoil spot exhibit mean reversion but all three futures price series are random. This has implications for investment as well as hedging strategies.
Keywords: castor seed, gold, guar seed, silver, maize, soyoil, soybean, mean reversion, persistence, randomness, commodity
JEL Classification: C22, C50, G14, Q14
Date posted: August 7, 2008 ; Last revised: August 8, 2008