Is the Causal Nexus between Agricultural Commodity Futures and Spot Prices Asymmetric? Evidence from India

Abstract

The present study investigates the potential asymmetric causal relationship between the Indian agricultural commodity futures and spot prices by employing asymmetric causality test [1] . The asymmetry issue in the causal relationship is vital because the impact of a negative shock might be different than the impact of a positive shock even in a situation in which the degree of the shock is the same in absolute terms. The asymmetric causality test results indicate that futures to spot price causalities are significant in all the eleven commodities under study in both positive and negative components. But the extent of causality from future to spot market is stronger in negative components as indicated by the causal parameter. The asymmetric causality from spot to futures price is significant for only two commodities, coriander and castor seeds. Overall the results indicate that agricultural futures market in India has a powerful price discovery function in all the selected commodities, which in turn indicates the efficiency of Indian agricultural commodity futures market.