A Study on Lead-Lag Relationship between Futures and Spot Markets in Case of Agricultural Commodity Derivatives in India

The two major economic functions of a commodity futures market are price risk management and price discovery.The effectiveness of the price risk management depends on how efficiently the futures market fulfills the price discovery function.The main objective of this study is to examine the lead-lag relationship between the futures and spot markets in case of select agricultural commodity derivatives traded in India.National Commodity and Derivatives Exchange Limited (NCDEX) being the largest agricultural commodity futures trading platform was purposively selected among all the National Commodity Exchanges functioning in the country.The sampling design used for the study is proportionate sampling which consists of five agricultural commodity derivatives viz.refined soya oil, guar seed, chana, soya bean and castor seed which were traded on the NCDEX platform.The study was purely based on secondary data which was drawn from the official website of NCDEX.The data comprised of daily closing spot prices and futures prices with near month (expiration month) maturity pertaining to the sample agricultural commodity derivatives traded on the exchange.The period of study was from January 2004 to November 2016.The lead-lag relationship between futures and spot prices of the sample agricultural commodity derivatives has been examined using VECM and Granger Causality test.In the long run, futures return was leading the spot return in case refined soya oil and chana.Similarly spot return was leading the futures return in case of soya bean and castor seed.In the short run, futures return was leading spot return in case of guar seed and spot return was leading futures return in case of castor seed.There was a bidirectional causality found in case of refined soya oil, chana and soya bean.