A Study Of Volatility Transmission Across Spot And Future Markets Of Soybean

Abstract

India is fourth largest producer of soybean in the world with majority share coming from Madhya Pradesh and contributes significantly to the Indian edible oil pool. Beside demand and supply, seasonal variations also affect the price volatility of soybean. The purpose of the study is to investigate the volatility transmission across spot and future markets of soybean traded in Indian commodity market. Volatility transmission determines how price signals flows from one market to other causing unanticipated price variations. The daily spot prices of soybean are collected from Nagpur, Kota and Indore spot exchanges whereas daily closing prices of highly liquid contracts of soybean are collected from NCDEX platform for the time period January 2010 to December 2021. The ARCH and GARCH (1, 1) models establish the presence of varying conditional volatility over a period of time and persistent volatility shocks in the prices of soybean. The estimates of Johansen cointegration test predict a long-run cointegration between future and spot prices of Kota exchange whereas the prices of Nagpur and Indore spot exchange do not shows a long-run co-movement with the future markets of soybean. The results of Pair-wise Granger Causality Tests predict uni-directional volatility transmission from Kota spot market to future market of soybean. The test results predicts that volatility transmission is absent between Nagpur spot market and futures as well as Indore spot market and futures. No volatility transmission has been estimated among different spot markets of soybean. The findings of the study are helpful to the market participants to hedge their financial risk and for researchers and policy makers to design appropriate hedging tools for risk management.