An Empirical Analysis of Price Discovery in Spot and Futures Market of Gold in India

An Empirical Analysis of Price Discovery in Spot and Futures Market of Gold in India

The broadest classification of the Indian financial market can be made in terms of commodity market, stock and security markets and foreign exchange market. Commodity markets are markets where raw or primary products are exchanged. These raw commodities are traded on regulated commodity exchanges, in which they are bought and sold in standardized contracts. Gold is a commodity which has been undergoing very serious price fluctuations in recent years. It has had its own impact on commodity trading too. Price discovery process of gold has always been a matter of wide discussion among researchers and policy makers. In this context this study aims at analyzing the price discovery process of Gold in Indian commodity market. It also looks into the volatility impact of futures price on spot price as well as the volatility impact of spot price on futures price. The study is completely based on the secondary data collected from the official website of NCDEX. The data extend for a period ranging from 23rd April 2009 to 29th December 2011. The daily data of spot and futures prices of gold during the period is taken into account. Various econometric tools are employed to test the hypotheses set. The VAR model result confirms the unidirectional relationship runs from the spot market to the futures market of gold in India. It reveals co integration and dynamic relationship between spot and futures markets of gold. The result of GARCH model implies that both futures as well as spot markets do have significant impact in the price volatility of gold in India. The result of VECM tells that spot market is dominant in the price discovery process which is a clear indication of the fact that spot market of gold is information efficient in India. The result is of great significance for the investors who wish to improve portfolio performance. With regard to policy making, a better understanding of the interconnectedness of these markets would be useful for the policy makers who coordinate the stability of financial markets. For marketers, it provides a reliable forecast of spot prices in the future to allow them to effectively manage their risks in the production or marketing process. The unprecedented uptrend in the price of gold and high volatility in recent years provides room for some important social implications.

K.J Joshy .

Economics