The Impact of Margin Changes on Commodity Futures Markets: Evidence From India

Abstract

Using 14 major commodity (bullion, base metal, agricultural and energy) futures contracts of Multi Commodity Exchange (MCX) from July 2009 to December 2018, we examine the effects of margin changes on commodity futures markets in India. Our empirical results indicate that all commodity futures except Aluminium, Copper and Brent Crude, net margin is maximum for the quartile closet to the maturity. Similarly, volatility of margin imposition is the highest for the quartile closet to maturity. The increasing margin has a negative effect for all non-agricultural futures contracts except Aluminium and Brent Crude. The impact of a margin decrease on volume is weaker compared to a margin increase except for Natural Gas and Crude Oil which show that volume increased on days when margin reduced. On the other hand, both increase and decrease in margins have negative impact on open interest in all the commodity futures contracts.

Keywords: Commodity futures; Margin requirement; Trading volume; Open interest

JEL Classification: G1; G10; G14; G18; G28