Market Efficiency and Volatility Spillovers in Futures and Spot Commodity Market: The Agricultural Sector Perspective

Future contracts in commodity market with limited maturities are primarily used for hedging commodity price-fluctuation risks or for taking advantage of price movements, rather than for the buying or selling of the actual cash commodity. This paper is an effort to analyze the market efficiency of the Indian commodity market and volatility spillover effects between the spot and future market with reference to agri commodities guar seed and chana. The result indicates that the commodity futures markets effectively serves the price discovery function in the spot market implying that there is a flow of information from future to spot commodity markets. Although the innovations in one market can predict the volatility in another market, the volatility spillovers from future to the spot market are dominant. However in Agri commodities the volatility in spot market may influences volatility in future market. SIBM 61 Volume VI, No. 2 September 2013