A Study on Market Behaviour and Price Discovery in Indian Commodity Markets

Abstract

The study analyzes the market behavior and causality effects between spot and futures prices in Indian commodity markets. The pattern is quite different for different commodities. Commodities that suffer from chronic backwardation should be analyzed in more detail, in order to understand the causes, and controls (known as backwardation limits) should be instituted for the same. Causality in commodities markets can be used to either hedge or speculate price movements: if changes in spot prices drive changes in futures prices, efficient hedging strategies can be formulated; whereas if changes in futures prices drive changes in spot prices, efficient speculation strategies can be formulated. Further, causality can be used in forecasting commodity spot and futures prices.