CommodityDerivativesinIndia AStudyofMCXComdex

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Commodity Derivatives in India: A Study of MCX Comdex
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International Journal of Marketing, Financial Services & Management Research________________________ ISSN 2277- 3622
Vol.2, No. 6, June (2013)
Online available at www.indianresearchjournals.com
COMMODITY DERIVATIVES IN INDIA:

A STUDY OF MCX COMDEX
PRASHANTA ATHMA*; K.P.VENU GOPALA RAO**
*PROFESSOR, DEPARTMENT OF COMMERCE,

OSMANIA UNIVERSITY COLLEGE FOR WOMEN,
KOTI, HYD., ANDHRA PRADESH, INDIA.
**RESEARCH SCHOLAR,
DEPARTMENT OF COMMERCE,
OSMANIA UNIVERSITY,
HYDERABAD, ANDHRA PRADESH, INDIA.
_____________________________________________________________________________________
ABSTRACT
Multi Commodity Exchange of India Limited (MCX) is a National Commodity Exchange with
branches spread all over India facilitating online Futures trading, clearing and settlement in
Commodities Futures. It offers around 40 Commodities in various sectors like Agriculture,
Energy, Precious and Non Precious metals.
It consists of group Indices i.e. Agriculture (MCX Agriculture), Metal (MCX Metal) and Energy
(MCX Energy). The year 2001 is taken as the base period for the purpose of average Index price.
The Comdex is periodically evaluated and the weights of its components are revised so that the
Comdex reflects the sentiments of the contemporary markets.
An attempt is made to study the temporal relationship between the Spot and the Futures prices of
the Commodity Market by analyzing the data of the Comdex. Various tools like 3 Day
Moving Average, Cross Correlation Function, Augmented Dickey-Fuller Test Statistic, Multiple
Regression, Johansen Co-Integration Test, Vector Error Correction Model and Granger Causality
Test are used to analyze the data.
The analysis of the data reveals that the markets are efficient in the price formation and
transmission of information between both the markets. The Comdex reveals that the average
Futures prices are greater than the average Spot prices due to the fact that the Comdex is a
combination of both perishable and non perishable commodities. The Futures showed the
leadership in the markets which is noticed in the CCF plot and is also supported by the Multiple
Regression where the Futures had a stronger influence in predicting the Spot prices and similar
results were seen in the Vector Error Correction Model and the Granger Causality. The markets
are efficient and availability of Comdex for trading can enable the market participants to hedge
their risk on a larger canvas.
KEYWORDS: MCX, Comdex, Vector Error Correction Model, Granger Causality

_____________________________________________________________________________________
Introduction
Multi Commodity Exchange of India Limited (MCX) is a National Commodity Exchange,
started on 10th November, 2003 with its headquarters in Mumbai, operates through 12 branches
spread all over India. It has received a permanent recognition from Government of India to
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Vol.2, No. 6, June (2013)
facilitate online Futures trading, clearing and settlement in Commodities Futures. It offers around
40 Commodities in various sectors like Agriculture, Energy, Precious and Non Precious metals.
At present, the MCX commands 86.2% of the total Commodity Market share and occupies
number 1 position in India. It is ranked as 1st among all the world exchanges in Gold, Silver and
ranks 3rd in Crude oil in the terms of number of Futures contracts traded.
MCX Comdex is a Commodity Index designed to reflect the market sentiment and the direction
of the market. It has been designed by MCX in collaboration with the Indian Statistical Institute,
Kolkata in the year 2005. It consists of group Indices i.e. Agriculture (MCX Agriculture)
occupying 20%, Metal (MCX Metal) occupying 40% and Energy (MCX Energy) occupying
40%, representing their respective segments traded on the exchange.
The year 2001 is taken as the base period for the purpose of average Index price. The Comdex is
periodically evaluated and the weights of its components are revised so that the Comdex reflects
the sentiments of the contemporary markets. The Comdex Futures are computed on the near
month’s active contract prices. MCX Spot Index computes the daily Spot Index value using the
current Spot prices of respective commodities taking 2001 as the base year. A graphical
representation of the composition of the Comdex is presented in the Chart 1.
Chart 1
MCX Comdex Structure
MCX COMDEX
MCX AGRI INDEX
Potato
4.59% 4.76%
4.14% Chana
Ref. Soy Oil
3.91%
Crude Palm Oil
3.19% Kapaskhalli
2%
M entha Oil
2% MCX METAL INDEX
35.41% Gold
Silver
15.21% Copper
Zinc
Aluminium
Nickel
2% Lead
9.66%
2% MCX ENERGY INDEX
2% 7.13%
2% Crude Oil
Natural Gas
Source:- www.mcxindia.com
27
Vol.2, No. 6, June (2013)
Need for the study of MCX Comdex

Theoretically, the Spot and the Futures prices of the assets are related and that a perfect
correlation is expected, such that neither market leads the other, but is not so in real life due to
the presence of imperfect information dissemination. An attempt is made to study the temporal
relationship between the Spot and the Futures prices of the Commodity Market by analyzing the
data of the Comdex.
Review of Literature
Kushankur Dey, Debasish Maitra (2012) conducted studies on pepper to examine the price
discovery process by applying Granger causality, Co-integration, Error Correction model.
There was a unidirectional causality from Futures to Spot prices in the pepper Futures market.
Sanjay Sehgal, Namita Rajput, Rajeev Kumar Dua (2012) studied the price discovery
relationship for Agricultural Commodities in Indian markets. They found an efficient price
discovery process in place. They recommended the strengthening of the market regulatory
framework. An emphasis on the autonomy of Forwards Market Commission (FMC) was made.
Their study also revealed the need for well developed warehousing and market linkages.
Jabir Ali, Kriti Bardhan Gupta, (2011) studied the long-term relationship between Futures and
Spot Prices for the Agricultural Commodities like Maize, Chickpea, Black Lentil, Pepper, Castor
Seed, Soybean and Sugar and found cointegration in the Futures and Spot prices. There was a
short-term relationship between them and the Futures markets had ability to predict spot prices
for Chickpea, Castor Seed, Soybean and Sugar. There was a bi-directional relationship
in the short run among the Maize, Black Lentil and Pepper.
M Hernandez, Torero (2009) conducted Granger Causality test to determine the direction of
information flows between Spot and Futures prices in the agricultural commodities. It was found
that Spot prices are generally discovered in Futures Markets. They argued for establishment of
sufficient food grain reserves globally, to fight the volatility in markets.
Shivashankar K (2007) in his thesis “Marketing of Dry Chillies in Karnataka – A management

appraisal” studies the agricultural marketing in case of dry chillies and its price integration
among the chillies markets in Karnataka. The major findings were grading in chillies were still
to be improved by providing standardized scientific practices. The relationship between the cost
of production and capital investments made in the chilli processing unit were inversely
correlated, where the Kudangol taluka incurred higher cost of processing compared to Hubli and
Byadgi talukas. The ADF tests were run to find out the stationarity and the cointegration of the
dry chilli price series. Hubli was found to be integrated for dry chillies whereas Kandangol and
and Byadgi markets were not. The markets for chilli powder had the ill effects of uncertain
weather conditions summed up with lack of labour, high cost of pesticides, parking,
transportation etc.
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Vol.2, No. 6, June (2013)
Research Gap
Many studies have been made focusing on trends in National Stock Exchange; efficiency in
information flow between the two markets i.e. Spot and the Futures, Co-integration between both
the markets. The study relating to Comdex of the Multi Commodity Exchange has not made.
Hence, the study is taken up.
Objectives
The objectives of the study are to
 Analyse the Co movement of the Futures and Spot price.
 Analyse the ability of the Markets as predictors.
 Study the causal relationship between the Futures and the Spot Commodity Markets.
 Examine the direction of the Causal relationship between the two Markets.
Scope of the Study

There are 21 Commodity Exchanges in India, of which, 5 are National Exchanges and 16 are
Regional Exchanges. Multi Commodity Exchange of India Limited (MCX), Mumbai, a National
Commodity Exchange occupies 86.2% share in the domestic Commodity Derivative Market,
leading the Indian Commodity Derivative Exchanges in terms of turnover and the number of
contracts traded as indicated in Table 1. Hence MCX is taken up for the purpose of the study.
Methodology
Period of the Study

The period of study is from 2005 to 2012 as Comdex was launched in the year 2005. The daily
historical closing prices of Comdex Futures and the Comdex Spot are collected from the MCX
website. The data collected is for a period of eight years from 2005 to 2012.
Sources of Data
The data are based on Secondary sources which include the various websites viz.,
www.fmc.gov.in; www.mcxindia.com; www.ncdex.com; www.fia.org.
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Vol.2, No. 6, June (2013)
Table 1
Indian Commodity Derivative Exchanges Turnover

(Volume in Lakhs Tonnes andValue in Rs. Lakh Crore)
MCX NCDEX NMCE ICEX ACEL REGIONAL

Year
Value Volume Value Volume Value Volume Value Volume Value Volume Value Volume
0.02 0.04 0.01 1.63 0.24 74.62 0.00 0.00 0.07 36.87 1.02 416.69
2003-04
(1.81) (0.01) (1.10) (0.31) (17.52) (14.08) (0.00) (0.00) (4.92) (6.96) (74.66) (78.64)
1.65 108.37 2.66 1249.58 0.14 37.7 0.00 0.00 0.06 35.31 1.26 546.46
2004-05
(28.58) (5.48) (46.09) (63.19) (2.42) (1.91) (0.00) (0.00) (1.06) (1.79) (21.85) (27.63)
9.62 1409.65 10.67 4830.34 0.18 70.44 0.00 0.00 0.06 35.15 1.08 478.28
2005-06
(44.51) (20.66) (49.37) (70.79) (0.85) (1.03) (0.00) (0.00) (0.26) (0.52) (5.02) (7.01)
22.94 1595.23 11.67 3839.00 1.13 368.66 0.00 0.00 0.07 35.83 0.96 290.56
2006-07
(62.38) (26.03) (31.75) (62.63) (3.07) (6.01) (0.00) (0.00) (0.19) (0.58) (2.62) (4.74)
31.26 2697.25 7.76 2453.66 0.25 47.96 0.00 0.00 0.11 46.1 1.28 328.44
2007-08
(76.88) (48.39) (19.08) (44.02) (0.63) (0.86) (0.00) (0.00) (0.26) (0.83) (3.16) (5.89)
45.88 4462.74 5.36 2015.45 0.61 184.24 0.00 0.00 0.09 35.525 0.55 165.54
2008-09
(87.41) (65.02) (10.21) (29.36) (1.17) (2.68) (0.00) (0.00) (0.17) (0.52) (1.05) (2.41)
63.93 6149.03 9.18 3137.44 2.28 495.91 1.36 122.10 0.06 21.38 0.84 217.07
2009-10
(82.34) (60.62) (11.82) (30.93) (2.94) (4.89) (1.76) (1.20) (0.08) (0.21) (1.08) (2.14)
98.42 7811.15 14.11 4090.39 2.18 320.43 3.78 286.12 0.30 82.92 0.71 153.21
2010-11
(82.36) (61.29) (11.81) (32.10) (1.83) (2.51) (3.16) (2.25) (0.25) (0.65) (0.59) (1.20)
155.97 8823.76 18.10 4175.15 2.68 347.62 2.58 234.85 1.39 335.14 0.54 109.22
2011-12
(86.05) (62.91) (9.99) (29.77) (1.48) (2.48) (1.42) (1.67) (0.76) (2.39) (0.30) (0.78)
Source: Compiled from Forward Market Commission website: www.fmc.gov.in.

Figures in parenthesis are the share of the exchange compared to the total
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Vol.2, No. 6, June (2013)
Tools for Analysis

To study the Causal relationship between the Futures and the Spot Commodity Markets and
examine the direction of the Causal relationship between these markets, the following tools have
been employed for the analysis of the data.
 3 Day Moving Average is calculated and graphical representation for visual analysis of the
relationship between both the markets.
 Cross Correlation Function is calculated from the data to establish the extent of
relationship between the Futures and Spot markets.
 Augmented Dickey-Fuller test Statistic to check for stationarity of data
 Multiple Regression for predicting the dependent variable based on independent variables
 Johansein Co-Integration test to find out the co integration of the Spot and the Futures
Markets.
 Vector Error Correction to determine the cause and effect relationship between Spot and
Futures.
 Granger Causality Test to ascertain unidirectional / bidirectional relationship between the
two markets i.e. Spot and the Futures.
Hypothesis
Hypothesis 1: Ho: Futures does not Granger Cause Spot Prices
H1: Futures do Granger Cause Spot Prices
Hypothesis 2: Ho: Spot price does not Granger Cause Futures
H1: Spot price does Granger Cause Futures
Co movement of the Markets

The co movement of the markets is analysed with the help of Moving Average and the intensity
in their relation is analysed with Cross Correlation Function that takes into consideration the time
lag.
3 Day Moving Average of MCX Comdex (2005-2012)

A 3 Day Moving Average is calculated to smoothen out the random and violent daily price
fluctuations in the markets. The initial observation of the Price Series has been done through
studying the historical daily closing price of the Futures and the Spot markets juxtaposed in the
graph. The 3 Day Moving Average graph of the Futures and Spot price series of the Comdex for
a period from 2005-2012, shows that both the markets are moving in tandem revealing a close
relationship between both the markets. The overall movement in the time series is highly
correlated and the Futures have led the Spot markets more number of times than the Spot
providing leadership traits.
31
Vol.2, No. 6, June (2013)
Chart 2
3 DAY MOVING AVERAGE GRAPH OF MCX COMDEX
2005-2012
4000
3350
VALUE
2700
2050
1400
Jun-05 Apr-06 Fe b-07 De c-07
Nov-08 Se p-09 Jul-10 May-11 Mar-12
YEAR
3 Day Moving Ave rage Future s 3 Day Moving Ave rage Spot
Source: Price Data from www.mcxindia.com

For a closer inspection and analysis of the behavior of the price series of both the markets in
Comdex, the graph for 2 years period at a time is presented where the change in the slope of one
price series can be identified and its impact on the other series can be studied.
In this period the Futures led the Spot more frequently and the Futures prices showing volatile
movements.
Chart 3
2005-2006
2100
1900
VALUE
1700
1500
Jun-05 Aug-05 O ct-05 Dec-05 Jan-06 Mar-06
YEAR
3 Day Moving Average Futures 3 Day Moving Average Spot

32
Vol.2, No. 6, June (2013)

The graph of the period 2006-2008 in Chart 4 indicates a very close proximity between the
movement of the Futures and Spot prices. The Futures were leading the Spot whereas the Spot
markets were not prominent in leading the Futures.
Chart 4
2006-2008
2900
2600
VALUE
2300
2000
Apr-06 Jul -06 O ct-06 Fe b-07 May-07 Se p-07 De c-07 Mar-08
YEAR
3 Day Movi ng Ave rage Future s 3 Day Movi ng Ave rage Spot

The 3 day moving average graph for the period 2008-2010 in Chart 5 shows that by and large,
the Futures moved ahead of the Spot more number of times over the Spot leading the Futures.
The markets moved closely together for brief period between in mid 2009 and early 2010 with a
narrow basis.
Chart 5
2008-2010
3500
3000
VALUE
2500
2000
1500
Apr-08 Jul -08 O ct-08 Fe b-09 May-09 Se p-09 De c-09 Mar-10
YEAR
3 Day Movi ng Ave rage Future s 3 Day Movi ng Ave rage Spot

33
Vol.2, No. 6, June (2013)

The 3 day moving average graph for the period for 2010-2012 in Chart 6 reveals that the Futures
led the Spot markets more times than the Spot leading the Futures. The basis in the markets was
very narrow for a larger part of this period.
Chart 6
2010-2012
4000
3500
VALUE
3000
2500
2000
Apr-10 Jul-10 O ct-10Feb-11 May-11 Sep-11 Dec-11 Mar-12
YEAR
3 Day Moving Average Futures 3 Day Moving Average Spot
Relationship between Futures & Spot Prices

It is often observed that the market participants react differently to the information they receive.
There is also a time lag between the assimilation of information and the reaction to it and this
phenomenon is known as lag effect. Cross correlation is performed to study and investigate the
temporal relationship between the markets taking into consideration the time lag.
Lead-Lag Relationship (2005-2012)

The Cross Correlation Function (CCF) for the period 2005-2012 calculated on the 3 day Moving
Average of the Futures and the Spot price series for 6 day lag is shown in Chart 7. The negative
lags represent the Spot prices leading the Futures and the positive lags represent the Futures
leading the Spot prices. The CCF for the long term series is highly correlated. The positive lags
(the Futures leading the Spot market) are flatter than the negative lags. A very high degree of
contemporaneous correlation is present in between the markets. A contemporaneous coefficient
of 0.9982 shows a perfect correlation between both the markets at zero lag, indicating the
adjustment of the markets at the same time (same day) which can be attributed to transparency
and effective dissemination of news.
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Vol.2, No. 6, June (2013)
Chart 7
CROS S CORRELATION FUNCTION GRAPH OF
MCX COMDEX 2005 - 2012
0.996
0.992
CCF
0.988
0.984
0.98
-6 -4 -2 0 2 4 6
LEAD-LAG PERIO D

For a closer inspection and analysis of the behavior of the price series of both the Markets in
Comdex, a Biennial CCF plot is presented for the years 2006-2008; 2008-2010 and 2010-2012.
The CCF Plot for 2005-2006 is shown separately for uniformity and contemporary information
to be analysed.
The observation of CCF for periods 2005-2007 show that the markets are highly correlated with
coefficient of correlation at 0.93 and reducing marginally when the markets are time shifted, but
still the CCF shows a higher degree of relationship over a period of 6 days. The positive lags
show a flat curve compared to the negative lags indicating the Futures providing the lead.
Chart 8
CROS S CORRELATION FUNCTION GRAPH OF
MCX COMDEX 2005-2006
0.93
0.89
CCF
0.85
0.81
0.77
-6 -4 -2 0 2 4 6
LEAD-LAG PERIO D

35
Vol.2, No. 6, June (2013)

The observations for the period 2006 to 2008 in Chart 9 reveals that the CCF of 1 day & 2 days
lead is marginally greater than the contemporaneous correlation. In this period it is clear that the
Futures market has provided leadership and may have provided useful clues in Spot price
formation.

The CCF of the period 2008 to 2010 in Chart 9 reveals that the Spot & Futures have a strong
linear relationship due to a high correlation coefficient at zero lag. The contemporaneous
correlation has improved over the previous biennial period. The flat slope in the positive lag
reveals that the Futures provided leading clues in Spot price formation.

The CCF of the period 2011 to 2012 in Chart 9 reveals that the Spot & Futures have a strong
linear relationship due to a high correlation coefficient at zero lag. A symmetrical plot in this
period does not provide enough clues of leadership between the markets.
Chart 9
BIENNIAL CROS S CORRELATION FUNCTION GRAPH OF
MCX COMDEX
0.965
CCF
0.93
0.895
0.86
-6 -4 -2 0 2 4 6
LEAD-LAG PERIO D
2006-2008 2008-2010 2010-2012
Stationarity Test
The Augmented Dickey-Fuller test (ADF) is conducted on the price series to check for
stationarity of data which is a precondition for further analysis. The ADF test results in Table 2
reveals that the First difference of the price series is stationary.
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Vol.2, No. 6, June (2013)
Table 2
Stationary Test: Spot & Future Prices
Augmented Dickey-Fuller test statistic
Spot Futures
Levels 1st difference Levels 1st difference
t-statistic -1.196586 -45.23544 -1.436398 -58.18548
Critical Values
1% -3.433196 -3.433197 -3.433197 -3.433197
5% -2.862683 -2.862684 -2.862684 -2.862684
10% -2.567425 -2.567425 -2.567425 -2.567425
Spot & Futures Prices as Predictors

Multiple Regressions is employed to analyze whether the Spot price can predict the Futures and
vice versa.
Futures as Predictor
The Log price return of the Spot is regressed with 2 days lag and lead of Log Futures price
return. The results of the Multiple Regression are presented in Table 3. The lagged Log Futures
return till 2 days and the Futures with zero lag, 1 day lag, 2 days lag and 1 day lead are
significant. The lagged Futures returns and the contemporaneous Futures price have an influence
on the Spot price formation.
Table 3
Effect of Lead and Lag of Futures Prices on Spot Prices
Dependent Variable: DLNSPOT
Method: Least Squares
White heteroskedasticity-consistent standard errors & covariance
Variable Coefficient Std. Error t-Statistic Probability
DLNFUT(-2) 0.319913 0.075746 4.223504 0.0000
DLNFUT(-1) 0.331091 0.041991 7.884771 0.0000
DLNFUT 0.148017 0.044282 3.342634 0.0008
DLNFUT(1) 0.057725 0.029119 1.982420 0.0476
DLNFUT(2) 0.016891 0.018943 0.891707 0.3727
C 5.46E-05 0.000229 0.238082 0.8118
F-statistic 147.7145 Prob(F-statistic) 0.000000
Spot as Predictor
When the Log Futures price return is regressed with the Log Spot returns the influence of Spot
price returns of 1 day lead and 2 days lead is noticed as in the results in Table 4.
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Vol.2, No. 6, June (2013)
Table 4
Effect of Lead and Lag of Spot Prices on Futures Prices
Dependent Variable: DLNFUTURES
White heteroskedasticity-consistent standard errors & covariance
Variable Coefficient Std. Error t-Statistic Probability
DLNSPOT(-2) 0.006762 0.024277 0.278530 0.7806
DLNSPOT(-1) 0.043645 0.026391 1.653787 0.0983
DLNSPOT 0.098037 0.025761 3.805635 0.0001
DLNSPOT(1) 0.349901 0.028097 12.45335 0.0000
DLNSPOT(2) 0.388171 0.025481 15.23349 0.0000
C 5.37E-05 0.000306 0.175369 0.8608
F-statistic 91.93448 Prob(F-statistic) 0.000000
The significant contemporary coefficient indicates a simultaneous reaction in both the markets to
the new information that take place indicating an efficient price formation providing no
opportunity for riskless arbitrage. The contemporaneous correlation of Futures is higher than the
Spot indicating a higher influence of the Futures on the Spot.
Long Run & Short Run Causality

To determine the cause and effect relationship between the two variables (Spot and Futures
prices), Vector Error Correction (a restricted Vector Auto Regression Model) is employed. This
Model requires co-integration of the two price series (Futures and Spot). Johansen Co Integration
Test is conducted to test the presence of a long run relationship between the Spot and Futures
Price series. The test revealed a long run relationship between the two series.
Table 5
Johansen Co Integration Test
Trend assumption: Linear deterministic trend
Series: LNSPOT LNFUTURES
Unrestricted Cointegration Rank Test (Trace)
Hypothesized Trace 0.05
No. of CE(s) Eigenvalue Statistic Critical Value Prob.
None 0.031916 71.45606 15.49471 0.0000
At most 1 0.000877 1.880929 3.841466 0.1702
Trace test indicates 1 cointegrating eqn(s) at the 0.05 level
From the results in Table 5, it is found that the price series is co-integrated. It is therefore safely
assumed that the integration between the markets is of long term nature and the Causality
between the markets can be determined by running the Vector Error Correction Model.
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Vol.2, No. 6, June (2013)
Effect of Futures
The Vector Error Correction Model (VEC) is conducted by taking the Spot prices as dependent,
results in Table 6 reveals a Error Correction Term(ECT) of -0.1828 and is significant, it can be
concluded that there exists long term the Causality of Futures price on the Spot prices and the
rate of correction of the disequilibrium is almost at 18%. The coefficient of one and two day lag
is significant indicating the short term causality of Futures on the Spot prices.
Table 6
Long Run & Short Run Effect of Futures
Dependent Variable: D(LNSPOT)
D(LNSPOT) = C(1)*( LNSPOT(-1) - 1.01989157464*LNFUTURES(-1) +
0.168870103293 ) + C(2)*D(LNSPOT(-1)) + C(3)*D(LNSPOT(-2)) +
C(4)*D(LNFUTURES(-1)) + C(5)*D(LNFUTURES(-2)) + C(6)
Coefficient Std. Error t-Statistic Probability
Error Correction Term -0.182894 0.014312 -12.77945 0.0000
(Long run causality)
Spot Short Run (-1) -0.071239 0.019866 -3.585937 0.0003
Spot Short Run (-2) -0.032491 0.018338 -1.771833 0.0766
Futures Short Run (-1) 0.165293 0.019186 8.615359 0.0000
Futures Short Run (-2) 0.261094 0.017282 15.10795 0.0000
Intercept 0.000290 0.000203 1.432975 0.1520
F-statistic 187.7706 Prob (F-Statistic) 0.000000
*Calculated from log Future and log Spot Prices
Effect of Spot
The VEC Model is conducted by taking the Futures prices as Dependent variable. The results in
Table 7 reveals an Error Correction Term (ECT) of -0.0655 which is significant. Thus, it can be
concluded that there is long term causation of the Spot on the Futures prices. The coefficient of
the 1 day lag is significant and 2 day insignificant. The one and two days lagged Spot prices
cannot jointly Cause the Futures.
39
Vol.2, No. 6, June (2013)
Table 7
Long Run & Short Run Effect of Spot Prices
Dependent Variable: D(LNFUTURES)
D(LNFUTURES) = C(1)*( LNFUTURES(-1) - 0.980496383014 *LNSPOT(-1) -
0.165576525478 ) + C(2)*D(LNFUTURES(-1)) + C(3) *D(LNFUTURES(-2)) + C(4)
*D(LNSPOT(-1)) + C(5)*D(LNSPOT(-2)) + C(6)
Coefficient Std. Error t-Statistic Probability
Error Correction Term -0.065573 0.021439 -3.058569 0.0023
Futures Short Run (-1) -0.192403 0.028180 -6.827551 0.0000
Futures Short Run (-2) -0.028594 0.025384 -1.126471 0.2601
Spot Short Run (-1) 0.080396 0.029180 2.755199 0.0059
Spot Short Run (-2) 0.025313 0.026934 0.939806 0.3474
Intercept 0.000442 0.000298 1.484045 0.1379
F-statistic 28.02913 Prob (F-Statistic) 0.000000
*Calculated from log Future and log Spot Prices
Thus it is found that the Futures has a long run causality on the Spot prices and the one and two
days lagged returns can jointly cause the Spot price. The Spot price has long run causality on the
Futures prices and the one and two days lagged returns cannot jointly cause the Spot price.
Causality Test
This test carries out pair wise causality tests to determine whether an endogenous variable can be
treated as an exogenous one. It is conducted to ascertain whether a unidirectional or
bidirectional relationship exist between both markets. Granger causality test is run on the price
series to find the direction of the information flow between both the markets.
The Granger Causality results are represented in the Table 8, which reveals that there was a
bidirectional information flow between both the markets. These studies further strengthened the
Cross Correlation analysis where we have found that the market is highly correlated and it is due
to the information flow between both the markets immediately.
Table 8
Causality of Spot Prices on Futures Prices and vice versa with 2 days lag
Pairwise Granger Causality Tests

Null Hypothesis: Obs F-Statistic Prob.
DLNFUTURES does not Granger Cause 2121 359.221 5E-135
DLNSPOT
DLNSPOT does not Granger Cause DLNFUTURES 7.63613 0.0005
40
Vol.2, No. 6, June (2013)
Conclusion:
Comdex is a notional Index which is not traded unlike its counterparts on the National Stock
Exchange of India Limited (NSE). Comdex acts a barometer reflecting the sentiments of the
market participants in the various segments of commodity like Agriculture, Metal and Energy.
The analysis of the data reveals that the markets are efficient in the price formation and
transmission of information between both the markets.
The Comdex reveals that the average Futures prices are greater than the average Spot prices due
to the fact that the Comdex is a combination of both perishable and non perishable commodities.
The Futures showed the leadership in the markets which is noticed in the CCF plot and is also
supported by the Multiple Regression where the Futures had a stronger influence in predicting
the Spot prices and similar results were seen in the Vector Error Correction Model and the
Granger Causality.
The Markets are efficient and availability of Comdex for trading can enable the market
participants to hedge their risk on a larger canvas.
References
1. Hernandez and Torero; IFPRI Discussion paper 00988, June 2010.
2. Jabir Ali, Kriti Bardhan Gupta, "Efficiency in Agricultural Commodity Futures Markets in
India: Evidence from co-integration and causality tests", Agricultural Finance Review,
Vol. 71 Iss: 2, pp.162 – 178
3. Kushankur Dey; Debasish Maitra, “Price Discovery in Indian Commodity Futures Market:
An Empirical Exercise”, International Journal of Trade and Global Markets, 2012, Vol.5,
No.1, pp.68 – 87.
4. Sanjay Sehgal, Namita Rajput Rajeev Kumar Dua, “Price Discovery in Indian Agricultural
Commodity Market” International Journal of Accounting and Financial Reporting ISSN
2162-3082 2012, Vol. 2, No. 2
5. Shivashakar “Marketing of Dry Chillies in Karnataka – A management appraisal studies the
agricultural marketing in case of dry chillies and its price integration among the chillies
markets in Karnataka.” 2007
Webliography
1. www.fmc.gov.in
2. www.mcxindia.com
3. www.ncdex.com
41
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Commodity Derivatives in India: A Study of MCX Comdex

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COMMODITY DERIVATIVES IN INDIA:

*PROFESSOR, DEPARTMENT OF COMMERCE,

KEYWORDS: MCX, Comdex, Vector Error Correction Model, Granger Causality

Need for the study of MCX Comdex

Shivashankar K (2007) in his thesis “Marketing of Dry Chillies in Karnataka – A management

Scope of the Study

Period of the Study

Indian Commodity Derivative Exchanges Turnover

MCX NCDEX NMCE ICEX ACEL REGIONAL

Source: Compiled from Forward Market Commission website: www.fmc.gov.in.

Tools for Analysis

Co movement of the Markets

3 Day Moving Average of MCX Comdex (2005-2012)

Source: Price Data from www.mcxindia.com

Source: Price Data from www.mcxindia.com

3 Day Moving Average of MCX Comdex (2006-2008)

Source: Price Data from www.mcxindia.com

Source: Price Data from www.mcxindia.com

3 Day Moving Average of MCX Comdex (2010-2012)

Source: Price Data from www.mcxindia.com

Relationship between Futures & Spot Prices

Lead-Lag Relationship (2005-2012)

Source: Price Data from www.mcxindia.com

Source: Price Data from www.mcxindia.com

Lead-Lag Relationship (2006-2008)

Lead-Lag Relationship (2008-2010)

Lead-Lag Relationship (2010-2012)

Source: Price Data from www.mcxindia.com

Spot & Futures Prices as Predictors

Long Run & Short Run Causality

Pairwise Granger Causality Tests

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