Information Transmission between NSE50 Spot and Derivative Platforms in India: Empirical Study
In this study, we examine the information transmission process between spot, futures and options segments for the NIFTY 50 index. The data is used from 2003 to 2013. Empirical results show that the spot market leads the price discovery process followed by the futures market and then the options market. The spot market again leads in the volatility spillover process while options dominate the futures contracts. There is a univariate skewness spillover from spot as well as futures to the options platform. Further, long term bidirectional kurtosis spillover is observed between spot and futures with former playing a more dominant role.
Keywords: price discovery, information transmission, volatility spillover, higher order moments, Bivariate EGARCH Model
JEL Classification: G13, G14, G15, C32
An Empirical Examination of the Process of Information Transmission in India’s Agriculture Futures Markets
This study examines the process of information transmission in India’s agriculture commodity futures market by investigating the price discovery and directional volatility spillovers between futures and spot prices of nine agricultural commodities viz., Barley, Cardamom, Castor seed, Chana (Chickpea), Chili, Mentha oil, Pepper, Soybean and Refined Soya, traded on Multi-Commodity Exchange (MCX) and National Commodity & Derivatives Exchange (NCDEX). The study uses the daily data from January 01, 2009 to May 31, 2013. The empirical results confirm the price discovery between futures and spot prices, indicating strong information transmission. The volatility spillover results indicate that in the short-run, there is strong volatility spillover from spot to futures market whereas in the long-run it is exactly opposite. Further, the study applies the directional spillover method pioneered by Diebold and Yilmaz (2012) to analyze the direction of informational spillover. The estimated results suggest that the magnitude of volatility based information spillover is low in agri-futures market. With the exception of Soybean and Refined Soya, the spillovers are basically intra-commodity and not inter-commodity .Finally, the study concludes that India’s agriculture commodity derivatives market is evolving in the right direction as futures market has started playing pivotal role in the information transmission process.
Keywords: Commodity futures market; Price discovery; Volatility spillovers, Spillover index, Information transmission
JEL Classification: C32, G12, G13
An Examination of Price Discovery and Volatility Spillovers of Crude Oil in Globally Linked Commodity Markets
This paper examines the price discovery and volatility spillovers between spot and futures as well as futures prices of three strategically linked oil markets viz., ICE, MCX and NYMEX from 05 February, 2006 to 15 October, 2012. The results confirm the long-run relationship between futures and spot prices in each market, futures prices lead spot prices in the price discovery process. Analysing the futures prices, we find that ICE is the most dominant futures trading platform followed by NYMEX and MCX in price discovery process. Thus, MCX an emerging market platform seems to act like a satellite market vis-à-vis international platforms. The volatility spillover results suggest that there is a long-term spillover from ICE to MCX and from MCX to NYMEX. The volatility information seems to flow from NYMEX to ICE. The GARCH-CCC & DCC model results confirm both cross market and with in market co-movements which become weak during the crisis period and tend to become stronger during the stable period. The study provides relevant implications for policy makers and market traders. The outcome of this study contributes to commodity market literature especially relating to information transmission between strategically linked markets.
Keywords: price discovery, volatility spillovers, energy markets, crude oil market, MGARCH
Futures Trading and Spot Market Volatility: Evidence from Indian Commodity Markets
In the context of emerging Indian commodity futures markets, this paper empirically examines the effect of futures trading activity (trading volume ; proxy of futures liquidity) on spot price volatility for seven agricultural commodities (guar seeds, turmeric, soya bean, black pepper, barley, Maize and Castor Seed).We decompose the futures volume into expected and unexpected components using Hodrick–Prescott filter (HP filter) .To clearly understand the destabilization effect, the relationship of the unexpected liquidity of futures market is done with Unexpected volatility of spot market returns which is estimated by taking the residuals of the GARCH model. We find that unexpected futures trading volume is Granger causing spot price volatility and are significant for five out of seven agricultural commodities (Guarseed, Turmeric, Soybean, Maize and Castor Seed), consistent with Bessembinder and Seguin (1992).We find reversed effect for one commodity i.e. Pepper the effect of spot volatility on futures trading and for Barley no causality is revealed either from future to spot or Vice-Versa. Besides being of interest to the participants, this study is likely to be useful in addressing the concerns of policy makers in India on alleged destabilizing effect of futures markets on spot prices as for emerging futures markets. Commodity exchanges must be strengthen and put under strict and active monitoring for early detection of anomalous trading behaviour. Financial autonomy and adequate powers should be given to Forward Market Commission to penalise any insider trading and price manipulations, this will minimize price distortions. The Government support shall lead to market growth and overall economic development.
Keywords: Indian commodity futures markets, Expected and unexpected futures trading activity, Trading volume, Open interest, Spot volatility
JEL Codes: G10, G14, G15
An Investigation of Price Discovery and Volatility Spillovers in India’s Foreign Exchange Market
The purpose of this paper is to examine the price discovery and volatility spillovers in spot and futures prices of four currencies (namely, USD/INR, EURO/INR, GBP/INR and JPY/INR) and between futures prices of both stock exchanges namely, Multi-Commodity Stock Exchange (MCX-SX) and National Stock Exchange (NSE) in India.The study applies cointegration test of Johansen’s along with VECM to investigate the price discovery. GARCH-BEKK model is used to examine the volatility spillover between spot and futures and between futures prices. The other two models namely, constant conditional correlation and dynamic conditional correlation are used to demonstrate the constant and time-varying correlations. In order to confirm the volatility spillover results, the study also applies test of directional spillovers suggested by Diebold and Yilmaz (2009, 2012).The results of the study show that there is long-term equilibrium relationship between spot and futures and between futures markets. Between futures and spot prices, futures price appears to lead the spot price in the short-run. Volatility spillover results indicate that the movement of volatility spillover takes place from futures to spot in the short-run while spot to futures found in the long-run. However, the results of between futures markets exhibit the dominance of MCX-SX over NSE in terms of volatility spillovers. By and large, the findings of the study indicate the important role of futures market in price discovery as well as volatility spillovers in India’s currency market.The results highlight the role of futures market in the information transmission process as it appears to assimilate new information quicker than spot market. Hence, policymakers in emerging markets such as India should focus on the development of necessary institutional and fiscal architecture, as well as regulatory reforms, so that the currency market trading platforms can achieve greater liquidity and efficiency.Due to recent development of currency futures market, there is dearth of literature on this subject. With the apparent importance of currency market in recent time, this study attempts to study the efficient behavior of currency market by way of examining the price discovery and volatility spillovers between spot and futures and between futures prices of four currencies traded on two platforms. The study has strong implications for India’s stock market especially at the time when its currency is under great strain owing to the adverse impact of global financial crisis.
Keywords DCC-GARCH, BEKK-GARCH, Currency futures market, Directional spillovers, Price discovery, Volatility spillovers
JEL Classification — G12, G13, C32
Profitability of Price, Earnings and Revenue Momentum Strategies : The Indian Evidence
Momentum has remained an unsettled anomaly in finance. In this paper, we examine the profitability of univariate and multivariate sorted momentum strategies based on prior returns, earnings surprises and revenue surprises using the data for 493 companies that form part of Bombay Stock Exchange (BSE) 500 index in India from January 2002 to June 2010. Momentum profits are found to be persistent in the intermediate horizon (up to six months). Price momentum winners provide higher returns vis-à-vis earnings and revenue momentum winners. On long-short basis, earnings momentum strategy is most profitable. Earnings momentum is able to subsume price and revenue momentum. Further, the informational content of revenue surprises is incrementally very small. Triple sorted momentum portfolio using all the three criteria provides the highest return of 2.28% per month. The Capital Asset Pricing Model (CAPM) and the Fama-French model fail to explain these returns. The post-holding analysis reveals strong overreaction patterns for both winners as well as losers, thus, supporting the behavioural explanation. Momentum winners and losers perform better during market upturns. This study contributes to the asset pricing and behavioral finance literature especially for emerging markets such as India.
Keywords: price momentum, earnings momentum, revenue momentum, CAPM, FamaFrench model
Company Characteristics and Common Stock Returns: The Indian Experience
The paper examines the relationship between selected company characteristics and common stock returns. The empirical results suggest that there is a strong size effect in the Indian stock market using both market-based as well as non-market based measures of company size. We also detect a weak value effect on stock returns, especially when E/P ratio is employed as a relative distress proxy. The study further finds that the present stock classification system in India fails to differentiate in returns on different categories of stocks. We recommend an alternative stock classification system based on company size and relative distress. The proposed classification procedure will provide better insights to investors about the risk-return characteristics of common stocks.