Download This PaperTesting for Linear and Nonlinear Causality in Spot and Future Prices of Notional Multi-Commodity Indices
Soni, T.K ‘Testing for Linear and Nonlinear Granger Causality in Notional Indian Multi-Commodity Indices’ ArthAnvesan- Bi-Annual Refereed Journal of SMVDU College of Management , 61-76
16 Pages Posted: 10 Feb 2012 Last revised: 8 Apr 2013
Date Written: February 10, 2012
Abstract
The present study investigates the linear and nonlinear causality between spot and future returns of four notional indices maintained by Multi Commodity Exchange of India (MCX). The data covers two periods June 2005 – June 2008 and July 2008 - November 2011. Apart from the conventional linear Granger test we apply a new nonparametric test for nonlinear causality by Diks and Panchenko after controlling for well-known calendar effects and long-run trends. The empirical results using both traditional and nonlinear causality tests indicate a stronger flow of information from futures to spot market in our results which confirms that future market are on the right track in playing an effective role in price discovery, thereby leading the spot market to become more efficient in the long run.
Keywords: nonparametric nonlinear causality, spot prices, future prices, price discovery
JEL Classification: C14, G14
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