PRICE DISCOVERY, RETURN AND MARKET CONDITIONS:

EVIDENCE FROM COMMODITY FUTURES MARKETS

*
K.G. Sahadevan

* Associate Professor, Indian Institute of Management, Prabandh Nagar, Off Sitapur

Road, Lucknow – 226 013. e-mail: [email protected].

The author wishes to acknowledge the anonymous referee for giving some useful
comments on the earlier version of this paper. The usual disclaimer however applies.

This paper is drawn on the report e ntitled “Derivatives and Price Risk Management: A
Study of Agricultural Commodity Futures in India” which is a broader study carried out
by the author with financial support from Indian Institute of Management, Lucknow.
 PRICE DISCOVERY, RETURN AND MARKET CONDITIONS:
EVIDENCE FROM COMMODITY FUTURES MARKETS

ABSTRACT

The present study is an investigation into the derivative markets in agricultura

commodities in India. The results obtained from regressions for a sample of six
commodities traded in four exchanges reveal that these commodity futures exchanges fail
to provide an efficient hedge against the risk emerging from volatile prices of many farm
products in which they carry out futures trading . A quantitative analysis of the
relationship be tween price return, volume, market depth and volatility on a sample of
twelve markets in six commodity items over a period of 38 months from January 1999 to
August 2001 shows that the market volume and depth are not significantly influenced by
the return and volatility of futures as well as ready markets. The results indicate that the
futures and ready markets are not integrated. The price volatility in the ready markets
does not have any impacts on the market conditions in futures markets. The exchange
specific problems like low volume and market depth, lack of participation of trading
members and irregular trading activities along with state intervention in many
commodity markets are major ills retarding the growth of futures market.

1
 PRICE DISCOVERY, RETURN AND MARKET CONDITIONS:
EVIDENCE FROM COMMODITY FUTURES MARKETS

Introduction

Instability of commodity prices has always been a major concern of the producers as well
as the consumers in an agriculture dominated country like India. Farmers’ direc
exposure to price fluctuations, for instance, makes it too risky for them to invest in
otherwise profitable activities. There are various ways to cope with this prob lem. Apar
from increasing stability of the marke through direct government intervention, various
actors in the farm sector can better manage their activities in an environment of unstable
prices through derivative markets. These markets serve a risk-shifting function, and can
be used to lock-in prices instead of relying on uncertain price developments.

Derivatives like forwards, futures, options, swaps etc are extensively used in many
developed and developing countries in the world. The Chicago Mercantile Exchange;
Chicago Board of Trade; NewYork Mercantile Exchange; International Petroleum
Exchange, London; London Metal Exchange; London Futures and Options Exchange;
“Marche a Terme International de France”; Sidney Futures Exchange; Singapore
International Monetary Exchange; The Singapore Commodity Exchange; Kuala Lumpur
Commodity Exchange; “Bolsa de Mercadorias & Futuros” (in Brazil), the Buenos Aires
Grain Exchange, etc. are some of the leading commodity exchanges in the world engaged
in trading of derivatives in commodities. Even in China during the last ten years of
liberalization of internal market many exchanges were set up for exclusive trading in
commodity futures and most of them like Shanghai Metals Exchange; China Commodity
Futures Exchange; China Zhengzhou Commodity Exchange, Beijing Commodit
Exchange, etc. have witnessed tremendous growth (UNCTAD, 1998). However, they
have been utilized in a very limited scale in India.

The objective of this paper is to survey the price risk management system prevailing in
agricultural commodity markets in India and to empirically investigate how efficient is

2
the price discovery function of futures for ensuring better hedge against price uncertainty
in some selected commodities. The study also examines the relationship between price
return, volume, market depth and volatility in futures marke ts.

An Overview of Futures Trade in India

Futures contracts are an improved variant of forward contracts. They are agreements to
purchase or sell a given quantity of a commodity at a predetermined price, with
settlement expected to take place at a futu re date. The futures contracts as agains
forwards are standardized in terms of quality and quantity, and place and date of delivery
of the com odity.

The terms and specifications of futures contracts however vary depending on the
commodity and the exchange in which it is traded. These terms are standardized and
applicable across the trading community in the respective exchanges and are framed to
promote trade in the respective commodity. For example, the contract size is important
for better management of risk by the customer. It has implications for the amount of
money that can be gained or lost relative to a given change in price levels. It also affects
the margins required and the commission charged. Similarly, the margin to be deposited
with the clearing house has implications for the cash position of customers because it
blocks working capital for the period of the contract to which he is a party.

Although India has a long history of trade in commodity derivatives, this segment
remained underdeveloped due to government intervention in many commodity markets to
control prices. The production, supply and distribution of many agricultural commodities
are still governed by the state and moreover, forwards and futures trading have only been
selecti ely introduced with stringent control . While free trade in many commodity
items is restricted under the Essential Commodities Act (ECA), 1955, forward and
futures contracts are limited to certain commodity items under the Forward Contracts
(Regulation) A ct (FCRA), 1952.

3
The first commodity exchange was set up in India by Bombay Cotton Trade Association
Ltd., and formal organized futures trading started in cotton in 1875. Subsequently, many
exchanges came up in different parts of the country for futures trade in various
commodities. The Gujrati Vyapari Mandali came into existence in 1900 which has
undertaken futures trade in oilseeds first time in the country. The Calcutta Hessian
Exchange Ltd and East India Jute Association Ltd were set up in 1919 and 1927
respectively for futures trade in raw jute. In 1921, futures in cotton were organized in
Mumbai under the auspices of East India Cotton Association (EICA). Many exchanges
were set up in major agricultural centres in north India before world war broke out and
they were mostly engaged in wheat futures until it was prohibited. The existing
exchanges in Hapur, Muzaffarnagar, Meeru and Bhatinda were established during this
period. The futures trade in spices was first organized by India Pepper and Spices Trade
Association (IPSTA) in Cochin in 1957. Futures in gold and silver began in Mumabi in
1920 and continued until it was prohibited by the government by mid -1950s. Options
are though permitted now in stock market, they are not allowed in commodit ies. The
commodity options were traded during the pre-independence period. Options on cotton
were traded until they along with futures were banned in 1939 (Ministry of Food and
Consumer Affairs, 1999). However, the government withdrew the ban on futures with
passage of FCRA in 1952. The Act has provided for the establishment and constitution
of Forward Markets Commission (FMC) for the purpose of exercising the regulatory
powers assigned to it by the Act. Later, futures trade was altogether banned by th e
government in 1966 in order to have control on the movement of prices of many
agricultural and essential commodities.

After the ban of futures trade all the exchanges went out of business and many traders
started resorting to unofficial and informal tra de in futures. On recommendation of the
Khusro Committee in 1980 government reintroduced futures i n some selected
commodities including cotton, jute, potatoes, etc. As part of economic liberalization of
1990s an expert committee on forward markets under the chairmanship of Prof. K.N.
Kabra was appointed by the government of India in 1993. Its report submitted in 1994
recommended the reintroduction of futures which were banned in 1966 and also to widen

4
its coverage to many more agricultural commodities and silver. In order to give more
thrust on agricultural sector, the National Agricultural Policy 2000 has envisaged externa
and domestic market reforms and dismantling of all controls and regulations in
agricultural commodity markets. It has also proposed to enlarge the coverage of futures
markets to minimize the wide fluctuations in commodity prices and for hedging the risk
arising from price fluctuations. In line with the proposal many more agricultural
commodities are being brought under futures trading.

Presently, 15 exchanges are in operation in India carrying out futures trading in as many
as 30 commodity items. Out of these, two exchanges viz. , IPSTA, Cochin and the
Bombay Commodity Exchange (BCE) Ltd. have been upgraded to international
exchanges to deal in international contracts in pepper and castor oil respectively.
Moreover, permission has been given to another two exchanges viz., The First
Commodities Exchange of India Ltd, Kochi (for copra/coconut, its oil and oilcake), and
Keshav Commodity Exchange Ltd., Delhi (for potato), where futures trading started very
recentl . Another 8 new exchanges are proposed to set up and some of them are
expected to start operation shortly. The government has also permitted four exchanges
viz., EICA, Mumbai; The Central Gujarat Cotton Dealers Association, Vadodara; The
South India Cotton Association, Coimbatore; and The Ahmedabad Cotton Merchants
Association, Ahmedabad, for conducting forward (non-transferable specific delivery)
contracts in cotton. Lately, as part of further liberalization of trade in agriculture and
dismantling of ECA, 1955 futures trade in sugar has been permitted and three new
exchanges viz., e-Commodities Limited, Mumbai; NCS Infotech Ltd., Hyderabad; and e-
Sugar India.Com, Mumbai, have been given approval for conducting sugar futures
(Ministry of Food and Consumer Affairs, 1999).

Is Futures Market Efficient?

Futures trade assumes significance in a volatile ready market and price risk managemen
because of the price discovery. The pri ce discovery is the process of determining the
price of a commodity, based on supply and demand factors. The expectations theory

5
hypothesises that the current futures price is a consensus forecast of the value of the
ready (spot) price in the future. For example, today’s 180 day pepper futures rate is a
market forecast of the ready rate that will exist in 180 days. The futures market for a
commodity is said to be efficient when the n-period futures rate (Ft,n) is equal to the
future ready rate (St+n). The efficient market ensures that the average difference between
today’s futures rate (with n day maturity) and the subsequent ready rate n days later was
zero. The difference, if any, represents both the futures rate’s forecasting error and the
opportuni y for gain (or loss) from open positions in the market. The efficiency of the
futures market is usually examined by testing the unbiasedness of futures rate as a
predictor of the future ready rate.

The hypothesis that the premium or discount in the futur es market is an unbiased linea
predictor of the price change in the corresponding ready market may be teste d using the
regression equation which has been utilized for testing unbiasedness of forward exchange
rate in Gregory and McCurdy (1986) and Levich (1989).

DS i t +1 = α + β FP i t + u i t +1 , (1)

t=1,…,T,
i=1,…,N (commodities)
in which

DS i t +1 ≡ ( S i t +1 − S i t ) and FP i t ≡ ( F i t − S i t ),

where St and St+1 are the logarithm of the ready rate at time t and t+1 respectively, Ft is
the logarithm of the futures rate established a time t for period t+1, and ut+1 is an error
term. In this form, the unbiasedness hypothesis implies that
 and . Such a
restriction is consistent with a model of a competitive market with no transaction costs,
risk-neutral speculators and market expectations which are rational. For that model, we
should have

6
 [ ]
Et DS i t +1 = FP i t , (2)

Where Et is the mathematical expectation operator conditional upon some information

set. The test relation (1) and the joint null hypothesis of rational expecta ions and no risk
premium implicit in (2) can be related by decomposing the actual change in the spot rate
into two orthogonal components:

[ ] [ ]
DS i t +1 = Et DS i t +1 + ( DS i t +1 − Et DS i t + 1 ) (3)

Substituting (2) into (3) yields (1) under the null hypothesis. Testing the unbiasedness
hypothesis involves estimating regression equation (1) and determining whether the
coefficient estimates of
and  are significantly different from zero and one respectively.
Alternatively, futures rate is an unbiased predictor of the future ready rate, if the average
forecast error ( et+1 in (1)) is not significantly different from zero. The optimal forecas
would be one that minimizes the average of the squared forecast errors i.e., minimum
mean square errors (MSE) over the sample period. The forecast error (et+1) represents the
speculative profit for traders who buy futures contracts at Ft and sell in the ready marke
at St+1. The forecast error is unlikely to be consistently large and positive because large
profits would attract speculators buying futures resulting increase in Ft and decrease in
et+1, thus removing profits.

Empirical Results

The test results based on the estimates of the equation (1) have been presented in table-1.
The study has utilized the OLS method to estimate the equation for daily futures prices o
six commodities viz., pepper, cotton, castor seed and castor oil, mustard seed and gur
traded in pepper exchange in Cochin, cotton exchange in Mumbai, Bombay Commodit
Exchange and Kanpur Commodity Exchange respectively. A description on the data
used for the analysis has been provided in appendix -I. The coefficient estimates of the
equation are corrected for serial correlation by using iterative Cochrane-Orcutt (see
Cochrane and Orcutt, 1949) procedure and the autoregressive parameter () estimates are
reported. To test the unbiasedness and whether futures prices are the optimal forecaster

7
of the future ready prices, the restriction
0 and =1 has been tested by estimating
equation (1) by OLS and by using Wald ch -square test of the joint hypothesis that
=0
and =1.

The joint null hypothesis that
=0 and =1 is rejected in all sample cases baring two
(Mustard seed, July 2000 and Gur, March 1998 contracts) out of 25 sample futures
contracts. The significant Wald chi-square test statistics indicate that futures markets are
not efficient in predicting the future ready prices. This result is rather expected given the
fact that many exchanges have thin trade volumes and infrequent trading. In spite of a
developed ready market in most of these commodities, futures markets do not attract
traders.

The results also testify the fact that the futures contracts are not perfect hedge against the
variations in ready prices. A perfect hedge guarantees that the profit or loss on the
futures contracts fully offsets the loss or profit on the physical transactions in the ready
market. Any disparity between the futures price for a specific maturity contract and the
ready prices in physical market on the day of the maturity of futures contract exposes the
participants to basis risk. The users of futures markets face this risk because the specific
physical commodity they wish to hedge does not have the same price development as tha
of the standardized futures contract. There may be many imperfections in the market for
the commodities under study which would make ready prices deviate from the
corresponding futures prices. The export oriented commodity like pepper the prices in
ready market are to certain extent driven by the unexpected changes in excha nge rate
which are not factored into the futures prices and by the demand situation in international
market. Secondly, in cases where government intervenes to manipulate the market by
affecting supply (e.g., cotton) the relation between futures prices and ready market prices
may get distorted. Thirdly, in most cases futures exchanges are not located in the area
where very developed ready market exists. Though gur futures are traded in Kanpur and
Hapur exchanges, this particular commodity has ready marke spreading across the
country. Finally, most of the agricultural products are produced in unorganized sector
involving thousands of smallholdings and there are many intermediaries between farmer

8
and wholesaler/exporter. This makes the supply and price development in ready m arket
unpredictable (Sahadevan, Jan-Mar 2002).

The Relationship between Price Volatility, Trading Volume, and Market Depth

The present study examines the interactions between return volatility, trading volume and
market depth using the price, volume and open position data from twelve futures markets
in six commodities. The commodity items and name of exchanges are listed in table-2.
Theories predict a positive contemporaneous correlation between trading volume and
price volatility. Evidence from empirical studies and reviews such as those by Jones,
Kaul, and Lipson (1994); Bessembinder and Senguin (1993) Gallant, Rossi, and Tauchen
(1992) and Tomek and Peterson (2001) proved that return volatility and volume are
positively related. It is expected that higher the market depth lower would be the price
volatility. The present study investigates the relationship of volume and market depth
with return and volatility and specifies their relationship in the following estimatable
form:

FV = α + β FR + β SD + e (4)
it 1 it 2 it it

FM = γ + η FD + η SD + w (5)
it 1 it 2 it it

th
where FVit is the futures trading volume for the i commodity at time t, FR, FM, and
FD represent return, depth and volatility of futures, and SD measures volatility of the
ready market prices. The return is calculated from the closing price (Pcit) data as

log(Pci,t/Pci,t-1). The open interest (position) is taken as a proxy for market dept
because it reflects the current willingness of futures traders to risk their capital in the
futures position, which indicates the level o f market depth. As traders take positions in
response to a perceived deviation of price from intrinsic value, volatility of futures and
ready price returns are defined as the deviations from their respective mean values. The
coefficients
1 and
2 in equation (4) expected to have positive values while 1 and 2 in

9
equation (5) have negative and positive values respectively. The market becomes deepe
and busy when return volatility is lower and vice versa. If the volatility of the ready
market is high, o n the contrary, futures market becomes more active and deeper. A
description on the data used for the analysis has been provided in appendix-I.

Empirical Results

The equations (4) and (5) have been estimated for all sample futures markets using the
OLS method and making necessary adjustments for autocorrelation (see Cochrane and
Orcutt [1949]) in their residuals. The tables 2 and 3 report the estimates of equations (4
and (5) respectively. The test of relationship between volume, futures price return and
ready price volatility does not provide any uniform evidence across the markets. The
futures price return found to have statistically significant and expected positive
relationship with the volume of futures trade only in gur exchange, Bhatinda and p epper
exchange, Cochin. Similarly, spot price volatility has significant role in explaining
volume of trade in gur in Meerut exchange, castorseed in the Bombay Commodity
Exchange and pepper in Cochin pepper exchange. The price volatility in the ready
market is expected to influence the volume in futures market if both the markets are
better integrated. Bombay and Cochin being the major exports centres price variations in
ready market have an immediate impact in the futures market as it gives forward cove r
against ready price risk. The statistically significan
2 coefficient signifies that the
futures markets are more utilized for hedging price risk than for making speculative
transactions. The overall results in table-2 indicate that price return volatility in futures
and ready markets do not determine the volume of trade in futures markets.

Similarly, the estimates of equation (5) reported in table-3 show that the net open
positions in futures markets are not determined by ready and futures price return
volatilities in any of the markets except for gur in Bhatinda exchange and Castorseed in
Bombay Commodity Exchange.

10
Correlation Analysis

Studies have shown that return volatility is positively related to the level of volume o
trade, and inversely to the market depth. In a deep market the pressure on prices would
be lower making the price return volatility lower. The correlation of futures and ready
price returns with volume and open positions and between the two return series a re
presented in table-4. In most cases the correlation coefficients are ve y low except the
one between futures and ready returns. The gur market shows very insignificant
correlation between the futures and ready returns. This is expected when country -wide
demand and supply conditions drive futures prices while the local ready markets are
primarily influenced by the supply and demand factors in a particular region. The high
correlations in other markets are the indications of better integration between the ready
and futures markets. In an ideal situation, the developments in t e ready market have
immediate impact on the market conditions in futures market and vice versa. The futures
markets in export commodities like castorseed, cotton and pepper have been driven by
ready market condition in those commodities and also the exchanges deal in these
commodities are situated in developed commercial centres where domestic and
international trades take place.

The coefficient of correlation between volume of transactions and futures price return
shows very low values in most of the markets. This is expected in a market where trad
volume is low with less frequent quotations available for futures transactions. Similarly,
the coefficient of correlation between net open positions (market depth) and price return
shows low values with negative sign in most markets. If the return is high, the holders
square off their transactions and they hold on to the contract when return is low.

The Test of Equality of Variances

The price and return behaviour in futures and ready markets may diffe r. However, both
the markets would be better integrated if the market is matured. Higher price volatility in
the ready market would make the futures market more active as it provides hedge agains

11
the risk and provide better opportunity for speculators f or booking profit. The uniform
and interdependent behaviour of the two markets has been verified by testing the equalit
of variances of futures and ready market price changes using Bartlett’s statistic (see, for
example, Judge, Griffiths, Hill, Lutkepohl and Lee [1985, p.448]). According to the test
there is evidence to reject the null hypothesis of equal variances if the test the statistic
exceeds th
 

   2 distribution with (K-1) degrees of freedom.

The results of Bartlett’s homogeneity of variance test are reported in table -5. The tes
statistic is significant only in case of gur in Bhatinda exchange and potato in Hapu
exchange signifying that these two markets are better aligned with their respective ready
markets. An essential condition for a vibrant futures market in any commodity is the
presence of an active ready market in the particular commodity in the region where the
exchange is located. This proximity and interdependence make risk management more
efficient and accessible to various participants. A highly volatile ready market boosts
trading activity in futures and a resultant increase in the volume of activity which would
eventually reduce futures price volatility.

To conclude, a quantitative analysis of the relationship between price return, volume,

market depth and volatility on a sample of twelve marke ts in six commodity items
showed that the market volume and depth are not significantly influenced by the return
and volatility of futures as well as ready markets. The results indicated that the futures
and ready markets are not integrated. The price vo latility in the ready markets did not
have any impacts on the market conditions in futures markets. The exchange specific
problems like low volume and market depth, lack of participation of trading members and
irregular trading activities along with state intervention in many commodity markets are
major ills retarding the growth of futures market (Sahadevan, July 2002). In the presence
of these ills no quantitative analysis of market conditions and interrelations would
provide meaningful results.

12
Conclusions

Commodity derivatives have a crucial role to play in the price risk management process
especially in any agriculture dominated economy. Derivatives like forwards, futures,
options, swaps etc are extensively used in many developed as well as developing
countries in the world. However, they have been utilized in a very limited scale in India
The production, supply and distribution of many agricultural commodities are controlled
by the government and only forwards and futures trading are permitted in certain
commodity items.

The results of the study reveal that many of the commodity futures exchanges fail to
provide an efficient hedge against the risk emerging from volatile prices of many farm
products in which they carry out futures trading. The results obtained from a statistical
analysis of the data on price discovery in a sample of six commodities traded in four
exchanges showed that the futures market in those commodities are not efficient in the
sense that the futures prices are not an unbiased predictor of the future ready rates. The
difference between he futures prices and the future ready prices is an indication o
inefficiency arising from the underdeveloped nature of the market. Many bottlenecks
faced by this segment are common across exchanges.

A quantitative analysis of the relationship between price return, volume, market depth
and volatility on a sample of twelve markets in six commodity items shows that the
market volume and depth are not significantly influenced by the return and volatility o
futures as well as ready markets. The results i ndicate that the futures and ready markets
are not integrated. The price volatility in the ready markets does not have any impacts on
the market conditions in futures markets. The exchange specific problems like low
volume and market depth, lack of participation of trading members and irregular trading
activities along with state intervention in many commodity markets are major ills
retarding the growth of futures market.

13
Appendi -I: Data

Based on availability of data, futures prices of six commodities viz., pepper, cotton,
castor seed, castor oil, mustard seed and gur, and or each commodity item daily closing
prices of multiple contracts (e.g., the cotton contracts maturing in September 1999,
September 2000 and April 2000) have been used for testing the unbiasedness hypothesis.
The details of maturity month and number of price data points under each contract are
provided in table-1. The data used for the analysis have been sourced from the respective
exchanges.

For the test of relationship between price return, volume, market depth and volatilit the
relevant data on gur futures traded in four exchanges, casterseed traded in three
exchanges and potato, cotton, pepper and coffee have been used. The commodities and
the exchanges in which they are traded are listed in table -2. T he study has utilized
month-end total open position, total volume and mont -end closing prices of the contrac
closest to expirati for a period of 38 months from January 1999 to August 2001. These
data are collected from Forward Markets Commission, Mumbai.

14
 Table 1: Testing the Unbiasedness Hypothesis

Commodity Contract
 Wald D-W Adj. 1 2 3

(NOBS) R2
Pepper June 1999 0.04 -0.05 110.19 1.99 0.93 1.23 -0.27 -
(117) (2.72)* (-0.46) (0.00) (13.75) (-2.98)

” Jan. 2000 -1.00 0.43 172.23 1.91 0.98 1.51 -0.68 0.17
(75) (-9.4)* (2.56)* (0.00) (13.01) (-3.48) (1.42)

” Dec. 1999 -0.07 0.33 16.7 1.85 0.96 1.45 -0.47 -

(51) (-1.15) (1.88)** (0.00) (11.71) (-3.77)

” Nov. 2000 -0.59 0.06 189.93 1.47 0.99 1.02 - -

(143) (10.92* (0.51) (0.00) (68.97)

” Dec. 2000 -0.23 0.02 76.93 1.51 0.99 1.29 -0.30 -

(142) (-1.22) (0.17) (0.00) (16.21) (-3.76)

” June 2000 -0.01 -0.05 137.05 2.00 0.94 1.33 -0.38 -

(126) (-0.70) (-0.52) (0.00) (16.10) (-4.59)

” Feb. 2000 -0.17 0.34 498.21 1.95 0.96 1.38 -0.47 0.10
(80) (-16.37)* (2.63)* (0.00) (12.11) (-2.52) (1.84)

Cotto April 0.08 0.94 11.89 1.72 0.97 1.47 -0.49 -

2000 (2.88)* (29.29)* (0.003) (18.36) (-6.14)
(119)
” Sep. 2000 0.01 0.55 75.56 1.72 0.97 1.23 -0.27 -
(114) (1.05) (10.34)* (0.00) (13.70) (-3.04)

” Sep. 1999 0.01 0.69 22.86 1.92 0.96 1.12 -0.23 -

(73) (2.47)* (10.03)* (0.00) (9.83) (-1.97)

Castor Seed Sep. 2000 -0.12 0.13 118.26 1.40 0.96 1.14 -0.17 -
(78) (-2.73) (1.61) (0.00) (10.28) (-1.48)

” June 2000 -0.04 0.64 14.27 1.68 0.88 0.99 - -

(60) (-0.96) (6.33)* (0.00) (45.12)

” Dec. 2000 -0.04 0.12 169.37 1.41 0.99 1.39 -0.42 -

(87) (-1.14) (1.76)*** (0.00) (14.35) (-4.26)

” Feb. 2001 -0.02 0.69 7.64 1.98 0.97 1.16 -0.19 -

(64) (-0.64) (5.98)* (0.02) (9.47) (-1.54)

” Apr. 2001 -0.02 0.10 73.04 1.96 0.91 1.29 -0.35 -

(34) (-1.14) (0.92) (0.00) (8.04) (-2.17)

15
Commodity Contract
 Wald D-W Adj. 1 2 3
(NOBS) R2
Castor Oil Apr. 2001 -0.03 0.61 45.11 2.20 0.95 1.30 -0.33 -
(70) (-1.94)** (9.73)* (0.00) (11.54) (-2.92)

” Apr 2000 0.13 0.76 86.06 1.71 0.99 1.03 - -

(68) (8.78)* (13.25)* (0.00) (35.73)

” Oct.2000 -0.06 0.35 37.46 1.45 0.98 1.38 -0.40 -

(52) (-1.64)*** (3.15)* (0.00) (10.89) (-3.15)

Mustard Oct. 2000 -0.11 0.62 471.44 1.48 0.92 0.73 0.36 -0.09
Seed (63) (-9.19)* (7.68)* (0.00) (5.30) (1.86) (-1.59)

” July 2000 -0.01 0.80 3.76 1.89 0.96 1.31 -0.35 -

(43) (-0.14) (7.69)* (0.15) (9.22) (-2.48)

Gur Dec. 1998 -0.03 0.93 13.39 1.93 0.99 1.06 -0.15 -
(136) (-3.32)* (46.86)* (0.00) (12.62) (-1.80)

” Mar. 1999 0.03 0.92 31.86 1.83 0.98 0.86 - -

(76) (5.54)* (26.06)* (0.00) (15.06)

” Dec. 1997 0.45 0.92 349.98 2.37 0.99 1.02 - -

(132) (16.26)* (38.77)* (0.00) (54.39)

” Mar. 1998 -0.03 0.98 4.31 1.72 0.99 0.94 - -

(73) (-1.97)** (38.87)* (0.12) (23.17)

” July 1997 0.19 0.99 1784.4 1.73 0.99 1.41 -0.52 -

(63) (39.18)* (37.03)* (0.00) (13.22) (-4.88)

The contract indicates the month and year in which the particular contract matures.
The values in parenthesis are t-statistics and one, two and three asterisks indicate level of confidence at
one, five and ten percent respectively.
Wald is the Wald Chi-square test statistic with the corresponding p-values in parenthesis.
D-W is the Durbin-Watson statistic. NOBS stands for number of data points under each contract.
The notations
1,
2, and
3 are first, second and third order autoregression parameter estimates
respectively with their t-statistic in parenthesis.

16
 Table 2: Relationship between Volume, Return and Volatility

Commodity & Name of the
1 2 D-W Adj. 1 2

Commodity Exchange R2

Gur; The Chamber of 5.37 0.003 -0.115 2.05 0.24 0.53 -

Commerce, Hapur (85.44)* (0.018) (-0.453) (3.51)

Gur; Vijay Beopar Chamber, 5.82 0.42 -0.09 1.74 0.22 0.52 -
Muzaffarnagar (50.16)* (1.09) (-0.24) (3.37)

Gur; Bhatinda Om and Oil 5.20 0.691 -0.762 1.84 0.23 0.20 -
Exchange. (118.9)* (2.48)* (-1.54) (1.15)

Gur; The Meeru Agro 3.49 -0.176 -0.562 1.92 0.17 0.43 -0.30
Commodities Exchange. (80.07)* (-0.68) (-2.1)** (2.53) (-1.75)

Castorseed; The Bombay -0.42 3.15 -4.25 1.81 0.23 0.38 -

Commodity Exchange. (-2.94)* (1.28) (-1.8)*** (2.26)

Castorseed; Ahmedabad 5.46 0.175 0.32 2.10 0.11 0.36 -

Commodity Exchange. (46.78)* (0.13) (0.22) (2.18)

Castorseed; The Rajkot Seeds 4.96 -0.767 0.401 2.00 0.12 0.39 -
Oil and Bullion Merchants (60.89)* (-0.67) (0.33) (2.39)
Association.

Potato; The Chamber of -0.28 1.20 -0.74 2.11 0.60 1.09 -0.44
Commerce, Hapur (-0.35) (1.06) (-1.18) (6.45) (-2.57)

Cotton;The East Indi 1.66 -0.068 1.35 1.96 0.75 0.90 -

CottonAssociation, Mumbai (2.34)** (-0.05) (0.82) (11.27)

Pepper; India Pepper & Spice 2.40 3.05 -2.78 2.07 0.04 - -
Trade Association, Cochin. (38.02)* (1.8)*** (-1.7)***

Coffee Plantationn A; Coffee -0.12 0.32 - 2.15 0.54 0.86 -

Futures Exchange, Bangalore. (-0.23) (0.27) (9.46)

Coffee Rob. Cherry AB; Coffee -0.58 -1.55 - 2.05 0.41 0.67 -
Futures Exchange, Bangalore. (-1.89) (-1.12) (5.03)

The values in parenthesis indicate t-statistics and o ne, two and three asterisks indicate level of confiden ce at one,
five and ten percent respectively. D-W is the Durbin-Watson statistic.
The notations
1, and
2 are first and second order autoregression parameter estimates respectively with thei t-
statistic in parenthesis.

17
 Table 3: Market Depth and Return Volatilities

Commodity &  1 2 D-W Adj. 1

Name of the Exchange R2

Gur; The Chamber of Commerce -0.295 0.526 0.059 1.89 0.04 -0.313
Hapur (-5.19)* (1.01) (0.094) (-1.84)

Gur; Vijay Beopar Chamber, 0.001 -0.184 -0.766 2.19 0.05 -

Muzaffarnagar (0.009) (-0.26) (-1.08)

Gur; Bhatinda Om and Oil -1.01 -1.66 4.54 1.95 0.24 -

Exchange. (-9.04)* (-1.8)*** (3.02)*

Gur; The Meerut Agro -1.89 0.95 -1.12 1.43 0.07 0.14
Commodities Exchange. (-9.52)* (0.74) (-0.83) (1.79)

Castorseed; The Bombay -3.27 6.02 -9.72 1.91 0.12 -0.19

Commodity Exchange. (-22.6)* (1.21) (-2.06)* (-1.04)

Castorseed; Ahme dabad 2.01 0.48 -1.39 2.02 0.15 0.45

Commodity Exchange. (14.2)* (0.35) (-0.93) (2.80)

Castorseed; The Rajkot Seeds Oil 0.566 -3.16 2.03 1.86 0.06 -0.18
*
and Bullion Merchants (10.64) (-1.45) (0.88) (-1.02)
Association.

Potato; The Chamber of -1.54 -0.559 0.474 2.09 0.08 0.35

Commerce, Hapur (-4.32)* (-0.43) (0.67) (2.00)

Cotton; The East India Cotton -0.005 -0.002 -0.328 2.04 0.60 0.83
Association, Mumbai (-0.007) (0.001) (-0.123) (8.21)

Pepper; India Pepper and Spice -0.17 -0.609 0.628 2.14 0.50 0.746
Trade Association, Cochin. (-1.36) (-0.706) (0.790) (6.13)

Coffee Plantation A; Coffee -0.69 0.27 - 1.77 0.63 0.79

Futures Exchange, Bangalore. (-3.12)* (0.36) (7.21)

Coffee Rob. Cherry AB; Coffee -1.11 0.514 - 1.59 0.51 0.72
Futures Exchange, Bangalore. (-5.56)* (0.679) (5.81)

The values in parenthesis indicate t-statistics and one, two and three asterisks indicate level of confiden ce
at one, five and ten percent respectively. D-W is the Durbin-Watson statistic .
The notaion
1 is the first order autoregression parameter estimate with its t-statistic in parenthesis.

18
 Table 4: Correlation Matrix

Commodity & Name of the Exchange Correlation Coefficient

FV FM SR

Gur; The Chamber of Commerce, Hapur FR -0.21 0.11 0.07

SR -0.13 -0.02 -

Gur; Vijay Beopar Chamber, Muzaffarnagar FR 0.14 -0.08 0.16

SR 0.04 -0.21 -

Gur; Bhatinda Om and Oil Exchange. FR 0.44 -0.25 0.10

SR -0.21 0.45 -

Gur; The Meerut Agro Commodities Exchange. FR -0.04 0.15 0.009

SR -0.26 -0.18 -

Castorseed; The Bombay Commodity Exchange. FR -0.21 -0.27 0.88

SR -0.37 -0.38 -

Castorseed; Ahmedabad Commodity Exchange. FR 0.25 -0.05 0.79

SR 0.21 -0.13 -

Castorseed; The Rajkot Seeds Oil and Bullion FR 0.10 -0.25 0.89
Merchants Association. SR 0.04 -0.14 -

Potato; The Chamber of Commerce, Hapur FR -0.03 -0.09 0.33

SR 0.05 0.15 -

Cotton; The East India Cotton Association, Mumbai FR 0.12 0.12 0.66
SR 0.08 0.07 -

Pepper; India Pepper and Spice Trade Association, FR 0.10 -0.20 0.97
Cochin. SR 0.02 -0.18 -

Coffee Plantation A; Coffee Futures Exchange, FR -0.009 -0.06 -

Bangalore.

Coffee Robusta Cherry AB; Coffee Futures FR -0.19 -0.04 -

Exchange, Bangalore.
SR represents ready price return. All other variables are as def ined in equations (4) and
(5).

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 Table 5: Bartlett’s Homogeneity of Variance Test

Variance of Bartlett’s
Commodity & Name of the Exchange Futures Ready Statistic
Return Return

Gur; The Chamber of Commerce, Hapur 0.019 0.013 1.391

Gur; Vijay Beopar Chamber, 0.018 0.017 0.014

Muzaffarnagar

Gur; Bhatinda Om and Oil Exchange. 0.016 0.006 7.37

Gur; The Meerut Agro Commodities Exchange. 0.018 0.016 0.103

Castorseed; The Bombay Commodity Exchange. 0.005 0.006 0.059

Castorseed; Ahmedabad Com odity Exchange. 0.006 0.005 0.041

Castorseed; The Rajkot Seeds Oil and Bullion 0.006 0.005 0.108
Merchants Association.

Potato; The Chamber of Commerce, Hapur 0.035 0.121 9.45

Cotton; The East India Cotton Association, Mumbai 0.004 0.003 1.952

Pepper; India Pepper and Spice Trade Association, 0.013 0.014 0.048
Cochin.

20
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