CHAPTER-2

REVIEW OF LITERATURE

AND RESEARCH

METHODOLOGY

2.1 REVIEW OF LITERATURE

Research is made in order to inform people with new knowledge or discovery. Every

piece of ongoing research needs to be connected with the work already done, to attain an overall

relevance and purpose. The review of literature thus becomes a link between the research

proposed and the studies already done. It tells the reader about aspects that have been already
established or concluded by other authors, and also gives a chance to the reader to appreciate the

evidence that has already been collected by previous research. Usually every individual research

project only adds to the plethora of evidence on a particular issue. Unless the existing work,

conclusions and controversies are properly brought about, most research work would not appear

relevant.

S Poornima, and Deepthy K (2015)1 the study is “Commodity Market in India” investigated the

Commodity market has a great potential to become a separate asset class for market savvy

investors, arbitrageurs and speculators. The retail investors should understand the risk and

advantages before entering into commodity market. The study attempts to throw light on

commodity market in India and to find out the impact of the SEBI-FMC merger and also to

analyze future growth prospects and challenges of Indian commodity markets.

Sathya S. (2015)2 in his study “A Comparative Study on Equity, Commodity, Currency

Derivatives in India - Evidence from Future Market with special reference to BSE Ltd, Mumbai”

examine that the Derivatives are financial contracts whose value is derived from some

underlying asset. These assets can include equities and equity indices, bonds, loans, interest

rates, exchange rates, commodities. The contracts come in many forms, but the more common

ones include options, forwards/futures and swaps. The results shows negatively correlated with

equity, commodity, and currency returns.

M.Thirumagal vijaya and D. Suganya (2015)3 in his study titled Marketing of Agricultural

Products in India Selling on any agricultural products depends on some couple of factors like the

demand of the product at that time, availability of storage etc. The task of distribution system is

to match the supply with the existing demand by whole selling and retailing in various points of
different markets like primary, secondary or terminal markets. Most of the agricultural products

in India are sold by farmers in the private sector to moneylenders or to village traders.

Sathya S (2015)4 in his study “A Comparative Study on Equity, Commodity, Currency

Derivatives in India - Evidence from Futures Market with special reference to BSE Ltd,

Mumbai” examine that the Derivatives are financial contracts whose value is derived from some

underlying asset. These assets can include equities and equity indices, bonds, loans, interest

rates, exchange rates, commodities. The contracts come in many forms, but the more common

ones include options, forwards/futures and swaps. The results shows negatively correlated with

equity, commodity, and currency returns.

Panda Rajesh (2014)5 in his study “Soybean Price Forecasting in Indian Commodity Market:

An Econometric Model” examine that the Econometric analysis of the data for the seed prices of

soybean helped in understanding the underlying pattern in the data. After analyzing the data of

160 observations, it’s apparent that proposed model of ARIMA (1,1,0) with additive seasonality

predicts the nature of fluctuation and explains the underlying seasonality. This model can be

used by traders, harvesters to minimize the scope for speculation and assume the change in prices

of soybean seed for near future. They found that the model can also be used by regulators to

predict the future prices and minimize the role of speculators who may otherwise destabilize the

market pricing mechanism.

Irfan ul haq and K Chandrasekhara Rao (2014)6 in his study “Efficiency of Commodity

Markets: A Study of Indian Agricultural Commodities” investigated the efficiency of Indian

agricultural commodities futures market through the use of time series methodologies. The

markets for all the ten commodities included in the study are efficient in long run. However,
short run inefficiencies and pricing biases exist, which can be attributed to dynamic lag structure

and slow adjustment to long run equilibrium.

Singh Archana and Singh Narinder Pal (2014)7 in his study “Commodity Futures Market

Efficiency and Related Issues: A Review of Existing Literature” investigated the market

efficiency in commodity futures markets is important to both the government and the

producers/marketers in India. Moreover there are some other important issues related to market

efficiency viz. effect of seasonality in agro-commodities, inflationary impact of commodity

futures and volatility spillover between spot and futures market. The review showed that the

results produced in available literature are often conflicting; the efficiency hypothesis is

supported only for certain markets and only over some periods.

Sagar Suresh Dhole (2014)8 in his study “Commodity Futures Market in India: The Legal

Aspect and its Rationale” investigated the antiquity of commodity futures market in India epoch

back to the ancient times citied in Kautialya’s ‘Arthasastra’ and have been commodity heard in

Indian markets for centuries, seems to be coined in 320 BC, referred in Forward Contracts

(Regulation) Act, 1952. They found the markets have made enormous advancement in terms of

technology, transparency and the trading activity. Interestingly, this has happened only after the

Government protection was removed from a number of commodities, and market forces were

allowed to play their role. Rational Government policies and the plinth of effective laws have

benefited in many ways like Credit accessibility, improved product quality, predictable pricing,

Import-export competitiveness, and price risk management and price discovery.

S. Rajamohan, G. Hudson Arul Vethamanikam and C. Vijaykumar (2014)9 in his study

titled “Commodity Futures Market in India” examined that the commodity trading has a long

history and it has been modernized in the market. The commodities trading are occupied an
important place in the economy it depends on the international trade A structural system has

been created for commodity trades. It is creating awareness and the more opportunity to the

investors and public. They found the market volatility is based on these commodities

performance. However the commodity market has provided huge support to the Indian economy.

Dr. G. Selvalakshmi and Dr. A. Arumugam (2014)10 “Impact of Price Level Change in Indian

Commodity Market” asserts that since its reintroduction, the commodity derivatives market is

thriving and the current trend shows the strong growth potential of the market, although, the

actual growth trajectory will depend upon the attitude of the policy makers and the efficiency of

the regulatory mechanism.

Shamim Ahmad and Mohammed Jamshed (2014)11 in his study titled “Nurturing an

Agriculture Friendly Commodity Derivatives Marketing in India examined the analysis and

discussion leads to the creation of a new institutional design” exclusively for governing,

monitoring and regulating the spot, futures and derivatives markets in agricultural commodities.

Central Government may pass an Inter-State Agriculture Produce Trade and Commerce

Regulation Act under entry 42 Inter-State Trade and Commerce of agriculture produce at

national level. They found the Government of India should empower spot exchanges to function

on pan-India basis through integrated single window.

Nilanjana Kumari (2014)12 in his research study “India‘s Foreign Trade with China with

Special Reference to Agricultural Commodities” investigated the Sino-Indian bilateral trade

relationship took an impressive turn during the last decade as China gradually ascended to

become the largest trading partner of India since 2008. It can be observed from the study above

that the liberalization of trade in Indian economy has positively affected our relation with the

Chinese government.
Sivarethinamohan and Aranganathan.P (2013)13 in his study “A Study on Investors’

Preference in Indian Commodities Market” finally the research conclude with investment

behavior of investors and their attitude towards commodities market investments, that is the

different respondents consider the different factors to take their investment decisions particularly

in commodities market investments, because it is having more both risk and return factors, if the

company advice the make the respondents to know the long benefits, they will also turn their

eyes on commodities market. They found that particularly the Bullions have more value and

being traded in huge volume per day.

Dr. (Mrs.) Kamlesh Gakhar and Ms. Meetu (2013)14 in his study “Derivatives Market in

India: Evaluation, Trading Mechanism and Future Prospects” investigated the Indian derivative

market has achieved tremendous growth over the years, and also has a long history of trading in

various derivatives products. The derivatives market has seen ups and downs. The new and

innovative derivative products have emerged over the time to meet the various needs of the

different types of investors. Though, the derivative market is burgeoning with its divergent

products, yet there are many issues. Solution of these issues will definitely lead to boost the

investors’ confidence in the Indian derivative market and bring an overall development in all the

segments of this market.

Dr. Sunitha Ravi (2013)15 in his research study “Price Discovery and Volatility Spillover in

Indian Commodity Futures Markets Using Selected Commodities” investigated the results of the

research study indicate that the futures market of the commodities is more efficient as compared

to spot market. The futures market also helps spot market in the process of Price Discovery.

They found the derivative instruments are available for the underlying commodities significantly

influence the volatility.

Gupta and Ravi (2013)16 explored the efficiency between commodity futures and spot markets

at MCX, NMCE and NCDEX for chana, guarseed, wheat, potato and cotton seed oil cake. They

found evidences of efficiency in most of the sample commodities. Further they examined the

association between the spot price of commodities like Chana, Guarseed, Refined soya oil, Gold

and Silver, and WPI. Spot prices of commodities were found to be responsible for rise in WPI

inflation.

Ankit Gala and Jitendra Gala (2012)17 has written “Guide to Indian Commodity Market”,

which throws focus on introduction to commodity market, commodity exchange in India,

regulatory frame work, commodity market terminology, list of commodities traded in India, how

to enter commodity market, how to trade in commodities market, factors influencing

commodities price, clearing and settlement mechanism etc.

Inoue and Hamori (2012)18 tested for weak form efficiency using MCX’s spot and futures

Index-Comdex for a period from Jan 2006 to March 2011. They used the dynamic OLS (DOLS)

and the fully modified OLS (FMOLS) methods. They found that the commodity futures market

was not efficient for the entire sample period but for the sub period July 2009 to March 2011.

Sehgal, Rajput and Dua (2012)19 examined ten agricultural commodities futures market for a

period from June 2003 to March 2011 on NCDEX. They found that markets were efficient for all

but one commodity (Turmeric). Also their results showed bi-directional Granger lead

Relationship for all select commodities except Turmeric. They concluded that Indian commodity

market is still is not competitive for some commodities.

Murthy and Reddy (2012)20 studied the relationship between the futures price and spot prices

and the farmer’s participation. For chili and turmeric, they found that futures prices affect spot
prices. Also, they found that “majority of the farmers are not aware of the commodity futures

trading and hence, do not participate in futures trading.

Kristoufek and Vosvrda (2012)21 examined the market efficiency of 25 commodity futures

across various groups like metals, energies, softs, grains and other agricultural commodities

using a proposed efficiency Index. They found that the most efficient of all the analyzed

commodities is heating oil, closely followed by WTI crude oil, cotton, wheat and coffee. They

also inferred the efficiency for specific groups of commodities viz. energy commodities were

found to be the most efficient and the other agricultural commodities the least efficient groups.

Soni and Singla (2012)22 analyzed the market efficiency of Guar gum futures market NCDEX

using an error correction model and GARCH-M-ECM. They found Guar gum futures market

was inefficient. They suggested over-speculation or market manipulation as the probable reason

for inefficiency.

Ali and Gupta (2011)23 tested the efficiency of the futures market for twelve agricultural

commodities traded at NCDEX. They used Johansen's co-integration analysis and Granger

causality tests. They found that there was a long-term relationship between futures and spot

prices for most of the select except for wheat and rice. Moreover, bi-directional relationships

were found between spot and futures prices of some of the selected commodities in the short run.

Mukherjee and Dr Kedar Nath (2011)24 in his study titled “Impact of Futures Trading on

Indian Agricultural Commodity Market” states that the usefulness and suitability of futures

contracts in developing the underlying agricultural commodity market, especially in an agro-

based economy like India has always been doubted. Therefore, the Researcher has made an

attempt to re-validate the impact of futures trading on the agricultural commodity market in

India. The daily price information in spot and futures markets, for a period of seven years (2004
– 2010) for nine major agricultural commodities, taken from different categories of agricultural

products, is incorporated into various econometric models to test the objective concerned. Like

most of the other studies undertaken on the global and Indian commodity markets, the

researchers study concludes that, the destabilizing effect of the futures contract on agricultural

products is casual in nature and tends to vary over a long period of time.

Dey, Maitra and Roy (2011)25 studied co-integration and volatility spillover in Indian pepper

futures market. They found a unidirectional causality from futures to spot prices of pepper. They

concluded that the volatility of one market leads to another market. They found a bi-directional

spillover effect under GARCH model but unidirectional under EGARCH i.e. from futures to

spot.

Smitha Biradar (2010)26 studied on “A Study of Indian Commodity Market: Need for Customer

Awareness and Education”. This study attempted to understand the awareness level of

commodity traders towards the futures trading. It also attempted to study the perception of

investors about commodity futures market. Moreover, it also focused on awareness level of

investors about regional, national, international commodity exchange and brokerage houses. The

data was collected by the survey method with the help of questionnaire from the Bangalore city.

110 respondents were selected for the study. This study revealed that awareness about futures

trading among the traders is negligible. For better awareness the exchange should play a greater

role building program and demonstrate the use of futures market to various potential investors in

the value chain. This study has been published by the Pondicherry university in the first edition

of the book entitles Indian commodity Market, 2010.

Anjali Choksi (2010)27 studied the investor’s perception regarding Derivative market in India.

He studied the demographic profile, investment preferences among derivative products, and

awareness of using derivative products.

Ashutosh Vashistha and Satish Kumar (2010)28 proposed that innovation of derivatives have

redefined and revolutionized the landscape of financial industry across the world. They have

studied the comparison between market trend of cash segment and derivative segment at NSE

and BSE. Further they have analyzed the derivative market trend among various derivative

products.

Koli.L.N and Dr.Brijesh Rawat (2010)29 studied the role of forward contracts in corporate risk

management. They have stated that the risk management often focuses on matters of insurance;

however there are several other major considerations when assessing areas of risk in the business

like hedging, risk covering, risk avoiding and risk transferring. They concluded that the forward

contracts are oldest and simplest tools for managing financial risks by studying payoff profile of

forward contracts.

Muthamizh Vendan Murugavel.D (2010)30 studied about the interest rate futures in India. In

this study, they have recommended that, some structural changes are carried out at the earliest. In

order to revive the promising financial product and to make it robust, they have suggested

making a long term plan in regard with the use of interest rate futures; to create much more

awareness on the usefulness of interest rate futures as a hedging tool against interest rate

volatility. More money from retail investors must be canalized to institutions like mutual funds,

insurance companies and pension funds so that they can trade on this platform. Good shorting in

the spot market allows the people to come to repo market for borrowing.
Ramanjaneyalu.N and Dr. A. P. Hosmani (2010)31 highlighted the need for awareness among

retail investors in regard with trading in derivatives and offer suggestions for safety and unrisky

trading in derivatives.

Kaur and Rao (2010)32 studied the weak form efficiency of guar seed, refined soy oil, chana and

pepper futures markets in India. They used run test and autocorrelation analysis for testing weak

form of efficiency.

N P Singh (2010)33 investigated efficiency of futures market of Guar Gum and Guar Seed in

India using Error Correction Mechanism (ECM). He concluded that the futures markets for Guar

Gum and Guar Seed were efficient in weak form.

Chakrabarti and Sarkar (2010)34 analyzed long term equilibrium relationship between the

multi-commodity spot market index (Comdex spot) and the futures market index (Comdex

futures), agricultural commodity spot and futures index, & commodity spot index and Nifty 50.

They also examined futures markets of potato, wheat, Masoor Grain and different types of rice at

NCDEX.

Sahoo and Kumar (2009)35 examined the efficiency and futures trading-price nexus for gold,

copper, petroleum crude, soya oil, and chana (chickpea) in commodity futures markets in India.

They concluded that the commodity futures market is efficient for all five select commodities.

Shailesh Sukhthankar (2009)36 stated in his study on commodity derivatives, that it is an

opportunity for banks to diversify risks by entering in commodity derivatives business. As and

when allowed to enter it, the commodity derivatives business holds enormous potential for

banks. It will be especially attractive for banks when they offer a combination of multiple

derivative products to satisfy the requirements of their customers.

Dipankar Chakrabarti and Ms. Rachana Nath (2009)37 indicated in their study on

“Technology Concept of Commodity Exchange” that technology is and will remain pivotal for

any commodity exchange in near future. Commodity exchange should utilize the new wave of

technology innovations to create differentiator for them. For smaller exchanges facing far tighter

resource constraints, the development of close and collaborative partnership with technology

developers will be the key to surviving and thriving in the technology era.

Balaji K. (2009)38 in his study undertaken on “Commodities Market in India: Policies, Issues,

Growth, Importance and The Commodities Market Update - The Year 2009” attempted to

understand the rules and regulations as well as the development of commodity market during the

year 2009. The study was descriptive in nature which gave overall idea about the regulatory

system prevailing in the system for the commodity market. This study revealed that the market

has made tremendous progress in terms of technology, transparency and the trading activity.

Lamon Rutten (2009)39 as per his study on commodity futures contract, global commodities

traded on the Indian exchange such as bullion, metals like copper, aluminum, steel, etc. and

energy product like crude oil, natural gas, etc., accounts for more than 80% of their average daily

turnover. These commodities are largely linked with global market as their imports and exports

are allowed subject to a marginal tariff incidence. Obviously, most of these commodities are

largely governed by their fundamentals (the supply and demand condition) at the global level &

partly by development on the domestic front. Therefore, it is necessary for the users of these

commodities to take position on a future platform with global linkages in order to hedge their

risk. For globally traded commodities, particularly metals and crude oil, the price discovered on

MCX have very high correlation (96% on an average) with the international benchmarks. This

also shows that the prices of MCX’s futures on globally traded commodity follows efficiently
and in tandem combined force of domestic and international fundamentals, this makes the

domestic online exchanges a cost effective and superior alternative to their international

counterparts.

Tata Rao Dummu (2009)40 conducted a study on commodity futures market. Commodity

futures market has a limited presence in developing countries. Historically, governments in many

of these countries have discouraged futures markets. If they were not banned, their operations

have been constructed by regulation. In the recent past, however, countries have begun to

liberalize commodity market. And in a reversal of earlier trends, the development of commodity

futures markets is being pursued actively with support from governments. This study focuses on

operating system and need of commodity derivative as well as Condition of modern commodity

exchanges and unresolved issues and future prospects.

N. P. Singh, V. Shunmmugam and Sanjeev Garg (2009)41 carried an explorative analysis on,

“How efficient are futures market operation in mitigating price risk?” It revealed that India being

an agrarian economy, instability in commodity prices as always reminds a major concern for the

producer as well as the consumers. Various other challenges have cropped in Indian agriculture

during the post-two regime, for instance dragging technological progress, depletion of water

resources, stagnant productivity and, more importantly, lagging market reforms, fragmented

marketing/trading of agriculture commodities in India. Given the exposure of farmers to such

risks and challenges, it makes their investment in farming and unprofitable proposition.

Debasish (2009)42 investigated the effect of futures trading on the volatility and operating

efficiency of the underlying Indian stock market by taking a sample of selected individual stocks.

The results of this study suggest that there is a trade-off between gains and costs associated with

the introduction of derivatives trading at least on a short-term perspective. The study offers a
unique contribution in examining the impact of introduction of index futures trading in NSE

Nifty index and the index futures covering a period since introduction of index futures in Indian

Capital Market. The results suggest that the market would have to pay a certain price, such as a

loss of market efficiency for the sake of market stabilization.

Rohini Singh (2009)43 discussed the advantages and disadvantages of using derivatives. Further

Evaluate the pay offs from options and their combinations. As far as investment analysis is

concerned, appreciate the role of Futures in Portfolio management.

Nath and Ligareddy (2008)44 found that futures trading had a destabilizing effect on spot

market. Results of regression, correlation and Granger Causality indicated that introduction of

futures trading led to increase in price of Urad significantly. Spot prices of these commodities

declined after the ban on futures trading was introduced. Price volatility was also increased

during the period, when trading in futures was allowed. Wheat price increased in post futures

period but the same was also coincided by steep fall in supply.

Sanjeev Varma and Rohit Chauhan(2008)45 studied the opportunities in Indian Derivatives and

commodities market. They have stated that the following factors driving the growth of financial

derivatives viz., increased volatility in asset prices in financial market, marked improvement in

communication facilities and sharp decline in their costs, development of more sophisticated risk

management tools and innovations in the derivatives markets.

Sandeep Srivastava, Surendra S Yadav and P K Jain (2008)46 on “Derivative Trading in

Indian Stock Market: Broker’s Perception” found that high net worth individuals and proprietary

traders contribute to the major proportion of trading volumes in the derivative segment. The

survey also revealed that investors are using these securities for risk management, profit
enhancement, speculation and arbitrage. It also emphasized to popularize option instruments

because they may prove to be a useful medium for enhancing retail participation.

Bose (2008)47 has tried to investigate the efficiency, in terms of prices dissemination, of India

commodity indices, both based on metals and energy product and also agricultural commodities.

The result on the indices clearly exhibits the informational efficiency of the commodity futures

market with a significant effect on stabilizing the volatility of the underlying spot market. Unlike

of such result, agricultural indices clearly failed to exhibit the future of market efficiency and

price discovery.

Mallikarjunappa and Afsal (2008)48 used GARCH model to study the implication of the

introduction of derivative trading on spot market volatility for S&P CNX Nifty and concluded

that price sensitivity to old news is higher during pre futures period than post futures period and

with introduction of futures, market volatility is determined by recent innovation. And also

explored effect of futures trading on spot market volatility by using GARCH model on CNX

Bank Nifty and found that there is no impact of futures trading on spot market volatility.

However, impact of new news increased and persistence effect of old news decreased in post

futures period.

Debashis (2008)49 did another study to explore the effect of futures trading activity on the jump

volatility of stock market by taking case of NSE Nifty stock index. He used multivariate Granger

causality modeling technique and found that futures trading is not force behind episodes of jump

volatility.

Nath and Linga reddy (2008)50 their study attempted to explore the effect of introducing futures

trading on the spot prices of pulses in India. The study selected three main commodities such as

Urad, Tuvar and Wheat. The study uses simple linear regressions, correlations, granger causality
test to find the relationship between futures and spot futures. The study found that volatilities of

urad gram and wheat prices were higher during post-futures period than that in the pre futures

period as well as after the ban of futures contact. However, they believed that the suspicion of

futures trading contributing for a rise in inflation appears to have no merit in the present context.

Easwaran and Ramasundaram (2008)51 analyzed the efficiency and price volatility of select

four commodities (castor, cotton, pepper and soya) on MCX and NCDEX. These markets were

found to be inefficient. They explained that the inefficiency was due to several factors like thin

volume and low market depth, infrequent trading, lack of effective participation of trading

members’ etc.

Alok Kumar Mishra (2008)52 examined during the last 4-5 years the Indian stocks as well as

commodity markets have grown considerably. The studies have explored the advantages of

adding commodities to a portfolio of equities in Indian context Bose (2007) found that Indian

stock markets are more volatile as compared to developed markets.

Kumar, Singh and Pandey (2008)53 have examined the hedging effectiveness of futures

contract on a financial asset and commodity in India market. By applying different time series

models, the author have found the necessary co-integration between the spot and derivative

markets and have show that both stock market and commodity derivative in India provide a

reasonably high level of hedging effectiveness.

Mishra (2008)54 observed that during the period 2003-08 the Indian stock as well as commodity

market has grown considerably. The studies have explored the advantages of adding

commodities to a portfolio of equities in Indian context.

Bhaduri and Durai (2008)55 found similar result while analyzing the effectiveness of hedge ratio

through mean return and variance reduction between hedge and un hedged position for various

horizon period e well at shorten time horizons.

Ruyin Long, Lei Wang(2008)56 studied the dynamic relationship among futures price, spot

price of shanghai metal and futures prices of London with the co-integration theory, Granger

causality tests, residue analysis, impulse responses function, and variance decomposition on the

VECM. The studies shows the three have the long equilibrium relationship, the copper futures

prices of shanghai have internalities to the future of London; the aluminum futures price has

externalities; the three have different price discovery function.

Viswa Balladar and Pratik ray (2008)57 studied Commodity future and Indian farmers: Myths

(or) Reality, studied the farmer participation in commodity futures trading and found that direct

participation of farmers in the commodity futures market is some more or less in India when

compare to developed nations. And also found that farmers are facing many problems like

illiteracy and indebted to the money lenders. And infrastructure problems like lack of cold

storage facility and transportation problem, in order to participate in commodity futures.

Drimbetas et al. (2007)58 studied the effect of introduction of futures & options into the

FTSE/ASE 20 Index on the volatility of underlying index by using EGARCH model. He

reported reduction in the conditional volatility of index and consequently increases its efficiency.

Alexakis (2007)59 used

GJR-GARCH model to investigate the effect of introduction of stock

index futures on the volatility of spot equity market by taking case of FTSE 20 Index and

concluded that the introduction of futures contract has not had a detrimental effect on underling

spot market.
Samanta and Samanta (2007)60 analyzed the impact of introducing index futures and stock

futures on the volatility of underlying spot market in India. He considered S&P CNX Nifty,

Nifty Junior and S&P 500 and used GARCH model for the study. He found that there is no

significant change in the volatility of spot market, but the structural changes in the volatility to

some extent. He also found mixed result in spot market volatility in case of 10 individual stocks.

Anthony Saunders and M.M. Cornett (2007)61 have studied the international aspects of

derivative security markets. It throws light on some of the biggest global derivatives markets, its

functions and regulatory framework for trading in such derivative products.

Masih AM and Masih R (2007)62 have analyzed a selected emerging and developed markets

with special reference to India. They have tried to find out what kind of relationship exists

between emerging and developed futures markets of selected countries.

Shyamala Gopinath (2007)63 stated that the derivatives market in India has been expanding

rapidly and will continue to grow. She opined that, there is need for greater transparency to

capture the market. Also further development of the market will also hinge on adoption of

international accounting standards and disclosure practices by all market participants including

corporate.

Bhaskara M. (2007)64 studied on “Commodity Futures Trading in India: A Role of National

Commodity Exchange”, with the objectives to study the organizational set up and the mode of

working of national level commodity exchange, to analyze the share of agriculture commodities

traded across the national level commodity exchange, to study the relationship between the sport

price and futures price of the selected agriculture commodities traded at national level

commodity exchange. Secondary data has been collected through the official websites of forward

market commission and various national level exchanges in India from the 2004-05 to 2006-07.
The analysis reveals that a majority of the member faced a problem of lack of trained staff in

commodity futures trading as it is of recent origin. A large proportion of client had difficulty in

predicting the trend in commodity futures market. Integration of spot and futures market for

certain commodities was observed only with respect to some exchanges and not in all.

S. M. Lokare (2007)65 carried the empirical study on “Commodity Derivatives and Price Risk

Management” which revealed that commodity derivatives trading in India notwithstanding its

long and tumultuous history, with globalization and recent measures of liberalization, has

witnessed a massive resurgence turning it one of the most rapidly growing areas in the financial

sector today. This study endeavors to test the efficacy and performance of commodity derivatives

in steering the price risk management. The critical analytics of performance divulges that these

markets although are yet to achieve minimum critical liquidity, almost all the commodities throw

an evidence of co-integration in both spot and futures prices, presaging that these markets are

marching in the right direction of achieving improved operational efficiency, albeit, at a slower

pace. In the case of some commodities, however, the volatility in the futures price has been

substantially lower than the spot price indicating an inefficient utilization of information. Several

commodities also appear to attract wide speculative trading. Hedging proves to be an effective

proposition in respect of some commodities, while others entail moderate or considerably higher

risk. As the markets develop, it remains to be seen whether the information content of futures

prices could be factored in the course of future monetary policy setting.

Lokare (2007)66 study found that although Indian commodity market is yet to achieve

minimum critical liquidity in some commodities (sugar pepper, gur and groundnut), almost all

the commodities shows an evidences of co-integration between spot and futures prices revealing

the right direction of achieving the improved operational efficiency, though at a slower rate.
Further hedging proves to be effective in respect of some commodities. However, for a few

commodities, the volatility in futures price has been substantially lower than spot price indicating

an inefficient utilization of information.

National Commodity and derivatives Exchange (2007)67 The NCDEX country’s leading

commodity exchange in agricultural commodities recently conducted an in-house study in the

case of wheat ,maize, sugar, urad and chana to determine the impact of futures trading on price

volatility. The annual average price volatility for the commodities in the period prior to the

launch of futures trading for these commodities has been compared with the post introduction

phase. The study concludes that price volatility in case of these commodities has come down

with the advent of futures trading and this is attributable to more efficient price discovery.

Piyamas Chaihetphon and Pantisa Pavabutr (2007)68 examined the price discovery process of

the nascent gold futures contact in the Multi Commodity Exchange of India (MCX) over the

period 2003 to 2007. The study employs vector error correction models (VECMs) to show that

futures price of both standard and mini contracts lead spot prices. They found that mini contracts

contribute to over 30% of price discovery in gold futures trade even though they account for only

2% of trading value on the MCX. The study reveals that trades initiated in mini contracts are

much more informative than what the size of their market share of volume suggests.

Vipul (2007)69 investigated the change in volatility in Indian Stock market after introduction of

derivatives by using extreme value measure of volatility. The result shows that there is reduction

in volatility of underlying share after introduction of derivatives attributable to a reduced

persistence in previous day’s volatility. However, Nifty shows contradictory pattern of increase

in its unconditional GARCH volatility and persistence.

Lokare (2007)70 found an evidence of co-integration in both spot and futures prices, showing

improved operational efficiency in pepper, mustard, gur, wheat, sugar (S), cotton, sesame seed,

gold, copper, lead, tin and bent crude oil, rubber, sesame oil, aluminium, zinc, silver and furnace

oil markets in India.

Thomas S.(2007)71 study found that although Indian commodity market is yet to achieve

minimum critical liquidity in some commodities (sugar, pepper, gur and groundnut), almost all

the commodities show an evidence of co-integration between spot and futures prices revealing

the right direction of achieving the improved operational efficiency, though at a slower rate.

Further hedging proves to be effective in respect of some commodities. However, for a few

commodities, the volatility in futures price has been substantially lower than the spot price

indicating an inefficient utilization of information.

Bhar and Hamori (2006)72 found that the prices of commodity futures traded on the Tokyo

Grain Exchange (TGE) did not move together in the long run. They suggested that the co-

integrating relation exists among commodity futures contract from 2000 to 2003 but not earlier

during the 1990s i.e. the price mechanism works better and the long run relationships among

prices becomes more apparent as a market develops.

Lorne N. Switzer and Mario El-Khoury (2006)73 investigated the efficiency of the

NYMEX/Division light sweet crude oil futures contract market during recent periods of extreme

conditional volatility. Crude oil futures contract prices were found to be co-integrated with spot

prices, including over the period prior the onset of the Iraqi war and until the formation of the

new Iraqi government on April 2005.

Xin Yu, Chen Gongmeng and Firth Michael (2006)74 investigated the efficiency of the

Chinese metal futures (i.e. copper and aluminum) traded on China's Shanghai Futures Exchange.
Using random walk and unbiasedness hypotheses, they concluded that China's copper and

aluminum futures markets were efficient during 1999–2004.

Pete Locke (2006)75 examined the transparency, liquidity and efficiency of the wholesale natural

gas market in the United States, both in absolute terms and compared to other commodity

markets. He concluded that natural gas futures were efficient. He found that natural gas prices

were quick to reflect changes in information, reflecting great efficiency. On the surface, the

evolution to market prices might appear to increase volatility.

Sahi and Raizada (2006)76 investigated the efficiency of wheat futures market at NCDEX and

analyzed its effect on social welfare and inflation in the economy. They used Johanson’s Co

integration approach for different futures forecasting horizons ranging from one week to three

months. Wheat futures market was found to be inefficient in short run and social loss statistic

also indicated poor price discovery. The growth of commodity futures volume was found to have

significant impact on the inflation in the economy.

Raizada and sahi (2006)77 The study covers wheat futures contract and it has shown that the

wheat futures market is even weak from inefficient and fails to pay the role of the spot price

discovery, spot market has found to capture the market information faster and therefore expected

to play the leading role. This inefficiency of the futures market may be attributed to the lack of

necessary data to truly capture the lead- lag relationship between the spot and futures market.

They have also suggested that the trading volume in commodity futures market, along with other

factors, have a significant impact on country’s inflation pressure.

LU Qing-fu and ZHANG Jin-qin (2006)78 examined the price discovery process and volatility

spillovers in Chinese spot futures market through johansen co integration vector error correction

model (VECM) and the bivariate EGARCH model. The empirical result indicate that the model
provided evidence to support the long term equilibrium relationship and significant bidirectional

information flow between spot and futures market in china, with futures being dominate.

Although innovations in one market can predict the futures volatility in another market, the

spillovers from futures to spot are more significant than the other way around.

Naresh Gopal (2006)79 The dynamic growth of the Derivatives market, particularly Futures &

Options and the perceived risks to the financial sector, continue to stimulate debate on the proper

regulation of these instruments. Even though this market was initially fuelled by various expert

teams survey, regulatory framework recommendations byelaws and rules there is still a debate on

the existing regulations such as why is regulation needed? When and where regulation needed?

What are reasonable and attainable goals of these regulations? Therefore this article critically

examines the views of market participants on the existing regulatory issues in trading Derivative

securities in Indian capital market conditions.

Vipul (2006)80 conducted a study to examine the Volatility in the Indian Stock Market after

introduction of derivatives. He finds that there is a reduction in EV volatility after introduction of

options and futures. Also he finds that it is mainly due to the reduced persistence in the previous

day’s volatility and arbitrage transactions in cash market.

Calado, Garcia and Pereira (2005)81 used data for eight derivative products to study the

volatility effect of the initial exchange listing of options and futures on the Portuguese capital

market. They did not find significant differences in the unadjusted and adjusted variance and

beta for the underlying stocks after the listing of derivatives. However, some of the underlying

stocks taken individually have experienced significant increases or decreases in variance after

derivatives listing. Finally, they concluded that the introduction of a derivatives market in the

Portuguese case has not had the average stabilization effect on risk as detected in other markets.
Yang et al (2005)82 examined the lead–lag relationship between futures trading activity and cash

price volatility for major agricultural commodities. Granger causality test and generalized

forecast error variance decompositions showed that an unexpected and unidirectional increase

in futures trading volume makes prices volatility up. Further, a weak causal association between

open market interest and cash price volatility was also established.

Kingsley Fong, David R. Gallagher and Aaron (2005)83 studied on the use of derivatives by

investment managers and its implications for portfolio performance and risk. Their studies

provide an empirical examination of derivative instruments used by institutional investors. The

analysis provides an insight into the role and benefits of derivative securities in active equity

portfolio management.

Robbani and Bhuyan (2005)84 used the GARCH model to examine the effect of introduction of

futures & option on the DJIA on the volatility & trading volume of its underlying stocks. The

result shows that level of volatility and trading volume increased after introduction of futures &

option on the index.

However and Nitesh (2005)85 studied the implication of soya oil futures in Indian markets using

simple volatility measures and concluded that the futures trading was effective in reducing

seasonal prices volatility but did not brought down daily price volatility significantly.

Wang and Bingfanke (2005)86 the result suggested a long term equilibrium relationship between

the futures price and cash price (spot price) for soya beans and weak short term efficiency in

soya beans futures market .The study also highlighted inefficient futures market for wheat and

suggested that it may have been caused by over speculation and government intervention.

Wang and H. Holly et al. (2005)87 studied the efficiency of the Chinese wheat and soyabean

futures markets. The results of Johansen's co-integration approach suggested a long-term

equilibrium relationship between the futures price and cash price for soyabeans and weak short

term efficiency in the soyabean futures market. The over-speculation and government

intervention were suggested reasons for wheat futures market inefficiency.

Qingfeng Wilson Liu (2005)88 examined the relations among hog, corn, and soybean meal

futures price series using the Perron (1997) unit root test and autoregressive multivariate co-

integration models. Accounting for the significant seasonal factors and time trends, they found

that inefficiency exists in these three commodity futures markets.

Kenourgios and Samitas (2004)89 showed that the copper futures contract market on the LME is

inefficient and did not provide unbiased estimates of futures copper spot prices. They tested for

both long-run and short-run efficiency using co-integration and error correction model.

Choudhry (2004)90 investigated the hedging effectiveness of Australian, Hong Kong and

Japanese stock market futures market. Both constant hedge models and time varying models

were used to estimate and compare the hedge ratio and hedging effectiveness. He found that time

varying GARCH hedge ratio out performed the constant hedge ratios in most of the cases, inside-

the sample as well as outside the sample.

Shirai S (2004)91 examines the impact of financial and capital market reforms on corporate

finance in India. India’s financial and capital market reforms since the early 1990s have had a

positive impact on both the banking sector and capital markets. Nevertheless, the capital markets

remain shallow, particularly when it comes to differentiating high-quality firms from low-quality

ones (and thus lowering capital costs for the former compared with the latter). While some high-

quality firms (e.g., large firms) have substituted bond finance for bank loans, this has not

occurred to any significant degree for many other types of firms (e.g., gold, export-oriented and

commercial paper-issuing ones). This reflects the fact that most bonds are privately placed,
exempting issuers from the stringent accounting and disclosure requirements \necessary for

public issues. As a result, banks remain major financiers for both high and low-quality firms. The

study argues that India should build an infrastructure that will foster sound capital markets and

strengthen banks’ incentives for better risk management.

Murry and Zhu (2004)92 investigated the impact of the introduction and exit of Enron Online

(EOL) on the efficiency of the U.S. natural gas market. Using a conventional EGARCH model,

he found little evidence that the introduction of EOL coincided with the reduction in the market

price volatility.

Kim (2004)93 examined the relationship between trading activities of the Korea Stock Price

Index 200 derivative contracts and their underlying stock market volatility by using EGARCH

and ARIMA. He found positive relationship between stock market volatility and derivative

volume while the relationship is negative between volatility open interests.

J B Singh (2004)94 made an attempt to understand the price risk of agricultural and derived

commodities for the period 1988-99 in India. He investigated the usefulness of futures market to

discover prices, manage uncertainty and risk, and improve the performance of agricultural

commodities. He found that among all commodities (pepper, custor seed, potato, gur, and

turmeric), castor seed (Ahemdabad and Mumbai) and pepper futures markets are efficient and

unbiased and also perform the role of risk management and hedging effectiveness.

Shenbagraman (2004)95 reviewed the role of some non-price variables such as open interests,

trading volume and other factors, in the stock option market for determining the price of

underlying shares in cash market. The study covered stock option contracts for four months from

Nov. 2002 to Feb. 2003 consisting 77 trading days. The study concluded that net open interest of

stock option is one of the significant variables in determining future spot price of underlying
share. The results clearly indicated that open interest based predictors are statistically more

significant than volume based predictors in Indian context.

Golaka C. Nath (2004)96 studied the behavior of stock market volatility after the introduction of

options. Using the GARCH Model, he concluded that the volatility of the market as measured by

Nifty index, subsided in the post futures period but in the case of individual stocks, the result is

still inconclusive.

Thenmozhi.M and Sony Thomas.M (2004)97 analyzed the effect of Nifty index derivatives

expiration days and weeks on spot market volatility using the GARCH technique. The study

concluded that on expiration days, there was a significant increase in the volatility but there was

a substantial decrease in volatility during the expiration weeks than the non-expiration weeks.

J B Singh (2004)98 examined the hessian spot market price variability before and after (over the

period 1988-97) the introduction of futures trading. He investigated the impact of futures market

on interpersonal and intra-seasonal price volatility. He found that the cash market volatility,

mainly inter-seasonal volatility, was has reduced after the introduction of hessian futures market.
99
Bandivadekar and Ghosh (2003) & Sah and Omkarnath (2005) also investigated the

behaviour of volatility in cash market in futures trading era. They also found that futures trading

have led to reduction in volatility in the underlying asset market but they attributed the degree of

decline in volatility in the underlying market to the trading volume in futures market. They

inferred that as the trade volume in the Futures and Options segment of BSE is very low, the

volatility in BSE has not significantly declined; whereas in the case of NSE (where the trade

volume is at the peak), the volatility in NIFTY has reduced significantly.

Daniel Jubinski and Mare Tomljanovich (2003)100 examined the effect of options introduction

on the conditional volatility of 548 individual equities selected from S&PCNX 500 AND S7P
Small Cap indices. The results of the study indicated that volatility either decreased or was

unchanged for a significant number of firms in sample in both the short run and long run and

thus demonstrated that options provided additional information about the underlying equity

security and was not serving as a destabilizing influence in the market.

Ahmed El H. Mazighi (2003)101checked the efficiency of futures markets for natural gas. He

found that efficiency is almost completely rejected on the both the International Petroleum

Exchange (IPE) in London (UK Market) and the New York Mercantile Exchange (NYMEX) the

US market.

Thomas (2003)102 reported that major stumbling blocks in the development of derivatives

market are the fragmented spot markets. Because of fragmentation, prices of major commodities

vary widely across Mandis (an Indian word for wholesale markets for agricultural markets) and

according to Bhattacharya (2007) these differences arise because of poor grading, differential

rates of taxes and levies and inadequacy of storage facilities.

Mckenzie and Holt (2002)103 tested market efficiency and unbiasedness in four agricultural

commodity futures markets – live cattle, hogs, corn, and soybean meal – using co-integration and

error correction models with GQARCH-in-mean processes. They found that each market is

unbiased in the long run, although cattle, hogs and corn futures markets exhibit short-run Sin

efficiencies and pricing biases. Models for cattle and corn outperform futures prices in out-of

sample forecasting.

K.G Sahadevan (2002)104 found that the commodity derivative have a crucial role to play in

managing risk especially in agricultural dominated economies. However, they have been utilized

in very limited scale in India’s long as prices of many commodities are restrained to certain

extent by Government intervention in production, supply and distribution, forward and futures
market for hedging price risk in those commodities have only limited constraints facing this

segment calls for more focused and pragmatic approach from government, the regulator and the

exchange for making the agricultural futures markets a vibrant segment for risk management.

Khelifa Mazouz and Michael Bowe (2002)105 investigated the relationship between options

listing and the time varying volatility of the underlying stock returns, simultaneously accounting

for several inherent sources of measurement bias, which arise in examining the impact of an

exchange’s options listing decision. They have concluded that options listing volatility was

neutral.

Thenmozhi.M (2002)106 studied the impact of the introduction of index futures on underlying

index volatility in the Indian stock markets. Applying Variance Ration Test, Ordinary least

square, Multiple Regression Analysis, she concluded that a futures trading has reduced the

volatility in the spot markets. Further, in a lead-lag analysis she found that the futures market

leads the spot index returns by one day.

Pilar and Rafael (2002)107 analyzed the effect of introduction of derivatives on the volatility and

trading volume of underlying Ibex-35 index. The study used GJR model and found that trading

volume increased significantly but conditional volatility decreased after introduction of

derivatives.

Wang and Bingfan (2002)108 studied the efficiency of the Chinese wheat and soybean futures

markets using Johansen's co-integration approach. The results suggest a long-term equilibrium

relationship between the futures price and cash price for soybeans and weak short-term

efficiency in the soybean futures market.

Chiang and Wang (2002)109 examined the impact of futures trading on Taiwan spot index

volatility. Their study also discussed the macroeconomic and asymmetric effects of futures
trading on spot price volatility behaviour. They used an asymmetric time-varying GJR volatility

model. Their empirical results showed that the trading of futures on the Taiwan Index has

stabilizing impacts on spot price volatility, while the trading of MSCI Taiwan futures has no

effects, except asymmetric response behaviour.

Aman Agarwal (2001)110 discusses about derivatives, its historical perspective, their economic

functions and inherent risks in general. His article also focuses on the development of derivatives

in India, the different instruments traded in the exchanges, future plans of this segment, trends

observed in the Indian capital markets, and accounting and taxation aspects of derivatives from

an Indian perspective.

Rahman (2004)111 examined the impact of trading in DJIA Index futures & futures option on the

conditional volatility of component stock. The study used GARCH model to make comparison of

conditional volatility of intra-day return before and after introduction of derivatives. The result

confirms that introduction of index futures & futures option on DJIA has no impact on

conditional volatility of component stock.

Rahman (2001)112 examined the impact of index futures trading on the volatility of component

stocks for the Dow Jones Industrial Average (DJIA). The study used a simple GARCH (1, 1)

model to estimate the conditional volatility of intra-day returns. The empirical results confirm

that there is no change in conditional volatility from pre- to post-futures periods.

Thiripal Raju.M and Prabakar R. Patil (2000)113 investigated nonlinear volatility with the help

of ARCH model to find out volatility changes due to introduction of index futures in S&P CNX

Nifty and its underlying stocks. They concluded that the volatility is non-linear and there is a

reduction in volatility both in the cash index and in its underlying stocks after the introduction of

trading on index futures in the Indian stock market.

Gulen (2000)114 found that the futures price of light sweet crude oil traded at NYMEX plays a

significant role in price discovery i.e. the futures price is an unbiased predictor of the spot price.

This observation was also supported by the widespread use of the futures price as a benchmark

all over the world as well as by the decision of the U.S. Minerals Management Service to switch

to the futures price from the posted price as the standard for calculating royalties. However, his

paper explicitly dealt with the crash in 1986.

New bold et al., (1999)115 investigated the effects of seasonality in testing efficiency over a

range of commodities. Using quasi-ECM model, at both short and long forecast horizons they

found evidence that the seasonal terms were significant i.e. the market was inefficient. The

information about the seasonal pattern was not embodied in the basis and could be used by

agents to predict future spot prices movements.

Yabuki and Akiyama (1996)116 examined export revenue of 12 major primary commodities in

developing countries and found that 8 out of 12 commodities show significantly higher price

effect than quantity effects.

Abhyankar (1995)117 observed that there are several reasons that why the lead-lag relationship

may exist. First, the lead-lag relationship between the spot index and futures markets may be

caused by infrequent trading of the composite stocks. That is, when the index is reweighed every

time, some composite stocks’ prices taken by the index may not be well on the price, which the

market just traded. It is particularly the case when the stocks are not traded frequently. Therefore,

the price the index takes is only the “stale” price. If index futures price is supposed to reflect the

instantaneous feedback to the changes in market-wide information flow, the spot index

containing “stale” prices should lag behind the futures price. Second, liquidity difference

between these two markets may be the cause for the lead-lag relationship. If composite firms in
the index take longer time to trade than the index futures, market-wide information will be

infused more quickly into the pricing than into spot market. Therefore, it is obvious that the lead-

lag relationship is a function of relative liquidity rather than the absolute liquidity. Third, market

frictions (e.g. transaction costs, capital requirements, and short-selling restriction) can make the

futures markets more attractive to traders with private information to exploit the information

advantage.

Leon and Soto (1995)118 analyze the long run dynamics of the price of the 24 most traded

commodities in 1900-92. The method they use testing for non stationary (unit roots) in the series

with a technique that allows structure breaks to be endogenously determined. The results show

that 15 of the 24 commodity prices present negative trends, six are trend less and three exhibit

positive trends, thus, the PSH, though not universal, holds far most commodities. Leon and Soto’

(1995) extend the eco-metric analysis to determine the persistence of shocks to commodity

prices, knowledge of the persistence of shocks is important when designing counterbalancing

policies such as commodity funds. The author uses a non paranalystic estimator of persistence

(the multiple variance ratios) and finds that 19 of the 24 commodity prices present persistence

levels substantially lower than the previous estimates. This evidence suggests that there may be

substantial room for stabilization and price support mechanism for the most commodities.

Sunil Damodar (1993)119 evaluated the 'Derivatives' especially the 'futures' as a tool for short-

term risk control. He opined that derivatives have become an indispensable tool for finance

managers whose prime objective is to manage or reduce the risk inherent in their portfolios. He

disclosed that the over-riding feature of 'financial futures' in risk management is that these

instruments tend to be most valuable when risk control is needed for a short- term, i.e., for a year

or less. They tend to be cheapest and easily available for protecting against or benefiting from
short term price. Their low execution costs also make them very suitable for frequent and short

term trading to manage risk, more effectively.

Bessembinder and Seguin (1992)120 examine whether greater futures trading activity (volume

and open interest) is associated with greater equity volatility. Their findings are consistent with

the theories predicting that active futures markets enhance the liquidity and depth of the equity

markets. They provide additional evidence suggesting that active futures markets are associated

with decreased rather than increased volatility.

Kaminsky (1989)121 the study of in the context of US Commodity markets suggests that for

certain commodities expected excess returns to future speculation are non-zero, though other

researchers also argue that these results do not necessarily imply that markets are inefficient.

Graciela Kaminsky and Manmohan S. Kumar (1989)122 used excess returns as a measure of

efficiency in seven different commodity markets over the 1976-1988 period. Their results

indicated that it is not possible to make any strong generalizations on the efficiency of the

commodity futures market for short-term forecast horizons. For longer periods, however, it does

appear that several of the markets may not be fully efficient. Sorenson provided a framework for

estimating model parameters, and especially seasonal parameters, using both the time-series

characteristics and cross-sectional characteristics of agricultural commodity futures prices for the

period 1972 to 1997. Estimation results were provided in the case of corn, soybeans, and wheat

using weekly panel-data observations of futures prices from CBOT. He found that normal

backwardation for soya beans and wheat while the situation for corn was mixed besides the

estimated seasonal features.

Fama and French (1987)123examined whether the futures prices for copper and other metals

contain evidence of forecast power or systematic risk premiums for the period 1967-1984. They
showed that the copper futures price contains suggestive evidence of both systematic risk

premiums and forecasting power.

Goss Canarella and Pollard (1986)124 tested the hypothesis that the futures price was an

unbiased predictor of the futures spot price using both overlapping and non-overlapping data for

the contracts of copper, lead, tin and zinc covering the period 1975-1983. Using three different

estimation methods, they confirmed the un-biasedness hypothesis.

Goss (1985)125 revised his study by introducing joint tests for the same metals of the LME

extending the sample period to 1966-1984. His results showed that the Efficient Market

Hypothesis (EMH) was rejected for copper and zinc.

Rausser and Carter (1983)126 examined the efficiency of the soybean, soybean oil, and soybean

meal futures markets using semi strong form test via structurally based ARIMA models. They

emphasized that “unless the forecast information from the models is sufficient to provide

profitable trades, then superior forecasting performance in a statistical sense has no economic

significance.”

Bigman, Goldfarb and Schechtman (1983)127 tried to test the efficiency of wheat, corn and

soybean trading at the CBOT. Based on F tests, they conclude that futures prices generally

provide inefficient estimates of the spot price at maturity.

Castelino (1981) 128 based on Samuelson (1965) several reasons have been suggested to explain

the non stationary observed in future prices. Broadly five sources of the volatility on agricultural

futures markets have been identified in the literature. They are year effect, the calendar month

effect, the contract month effect, the maturity effect and trading session effect. In practice,

various de-trending schemes are employed, sometimes leading to contradictory results.

Goss (1981)129 examined the hypothesis that futures prices were unbiased predictors of the

subsequent spot prices for the markets of copper, tin, lead and zinc, using daily price data from

the LME for the period 1971-1978. He rejected the unbiasedness of futures prices for lead and

tin.

Danthine (1978)130 first criticized Samuelson’s (1965) argument that spot commodity prices

may not follow a sub-martingale, if they vary with such factors as the weather which may be

serially correlated. He went on to develop possible reasons why the link between a martingale

process and efficiency in commodity markets could be problematic.

Elam (1978)131 developed a semi-strong test of efficiency. He estimated an econometric model

of the US hog market and used it to generate price forecasts. These forecasts were in turn used in

a fundamental trading strategy. His trading rule yielded profits over the period studied and led

Elam to conclude that the hog futures market is not efficient.

Samuelson (1965)129 first analyzed the role of futures prices as predictor of futures spot prices

for a given contract and found that it follows a martingale; in other words, today’s futures prices

are the best unbiased predictor of tomorrow’s futures prices.

RESEARCH METHODOLOGY

2.2 RESEARCH GAP

Numbers of studies have been conducted to assess the impact of commodity derivatives trading

on the underlying markets mostly related to the developed nations like US and UK markets and
other developed countries. A few studies made an attempt to know the impact of commodity

derivative trading on emerging market economies, like India and a very few studies have been

conducted on commodity derivative trading in Andhra Pradesh. But there is no specific study at

micro level on “Investment Behaviour of Derivative investors towards select commodities in

Rayalaseema region of Andhra Pradesh”. Hence, in order to bridge this gap, the present research

work is undertaken. It is an attempt to provide a solution for existing problems being faced by

derivative investors in Rayalaseema region of Andhra Pradesh.

2.3 NEED FOR THE STUDY

After liberalization of Indian economy in 1991, many reforms have taken place in financial

sector in respect of non-agricultural commodity market such as Gold and Silver. India is the

largest buyer and consumer of Gold and Silver in the world. Despite the fact that it is fast

developing into a major economic powerhouse in the world still continues to look up at other

markets to decide the local prices of commodities. India being the largest producer and consumer

of a large number of commodities, Indian markets should have been the price setters. But

presently, they are price takers. For commodity markets, in which it is either one of the largest

producers or consumers or both, India has immense potential to have a domestic market that is

strong enough to set global market prices. In fact, given its share in global supply and demand as

a dominant player in the world market, the country has the potential to become the price setter in

commodities. It has widely recognized and accepted that the derivative investors constitute a

vital segment of the Indian securities market and greater understanding of the perceptions,

preferences, and behaviour of these investors which is very vital in the policy formulation on

development and regulation of the securities market to ensure the promotion and protection of

interests of derivative investors. The present study aims to know the investment perceptions and
behaviour, investment pattern, satisfaction level and assessment of investment risks of the traders

regarding commodity derivative trading. Thus, it is an attempt to study the socio-economic status

and investment attitude of the investors in Rayalaseema region of Andhra Pradesh. Further, to

examine the effect of futures trading and level of volatility with respect to agriculture and non-

agriculture commodities in the Indian derivative market. There is no specific study in

Rayalaseema region of Andhra Pradesh. Hence, the present study will help the policy makers,

stock brokers, risk managers, financial consultants and investors to find out the investment

pattern of derivative commodities while investing in agriculture and non-agriculture commodity

futures.

2.4 SCOPE OF THE STUDY

The present study is undertaken to ascertain the derivative investors’ awareness, investment

pattern and satisfaction level and its impact on investment behaviour of select commodities in

Rayalaseema region of Andhra Pradesh. The study is confined itself to stakeholders associated

with commodity derivative market. The stakeholders considered are hedgers, speculators and

arbitrageurs. This study is limited only to a few select commodities like Cotton and Turmeric

under agricultural commodities, Gold and Silver under non-agricultural commodities in

Rayalaseema region of Andhra Pradesh. Further there is a wide scope for future research

covering many other agricultural and non agricultural commodities. Many research activities

may be taken up in the field of derivative contracts like forwards, futures, options and swaps.

2.5 SCOPE FOR THE FUTURE RESEARCH

Further there is a scope to study taking agricultural and non-agricultural commodities

separately for better understanding. The research can be done with the comparison of the

commodities in other regions of Andhra Pradesh and other states of the country.
2.6 OBJECTIVES OF THE STUDY

1. To know the origin, history, growth and development of derivatives trading in India

2. To trace out the trends in derivative market operations with special emphasis on

protection of derivative investors by the Forward Market Commission(FMC)

3. To study the socio-economic profile of derivative investor’s vis-à-vis the profile of

Rayalaseema region of Andhra Pradesh, with a view to assess their impact on the

investment habits of the people.

4. To analyse the investment behaviour of derivative investors in select agriculture and

non-agriculture commodity derivatives.

5. To examine the risk perceptions of derivative investors towards the factors for trading

in select commodities.

6. To offer suitable suggestions for designing better programs for the growth and

development of derivatives market.

2.7 METHODOLOGY OF THE STUDY

The study is based on both primary and secondary data. However, as the study is

descriptive in nature it describes the behavioral aspects of derivative investors. The primary data

is collected through a structured questionnaire. The questionnaire is designed to elicit the

information about the socio-economic profile of the derivative investors, their awareness levels

and behaviour about the commodity derivative market and their risk assessment behaviour. The

questionnaire is designed keeping in view the objectives of the present research work and it is
pre-tested by means of a pilot study. The relevant secondary data gathered from annual reports of

FMC (Forward Market Commission) MCX, NCDEX, books, journals, periodicals, dailies,

magazines and websites. The data and the information collected with the help of the

questionnaire are processed and analyzed by using SPSS software.

2.8 SAMPLE DESIGN

2.8.1 Theoretical Population: Theoretical population includes agricultural and non-agricultural

derivative investors.

2.8.2 Study population: Agricultural and non-agricultural derivative investors of Anantapur,

Kurnool, Kadapa and Chittoor districts of Andhra Pradesh.

2.8.3 Sampling Frame: The registered agri-cultural and non-agricultural derivatives investors at

the derivative brokerage firms situated in Anantapur, Kurnool, Kadapa and Chittoor districts

were taken as sample frame for the research.

2.9 SAMPLE

It is not feasible for the researcher to study the whole population due to time and resource

constraints. Hence, by using a convenience sample, 600 samples were selected by covering 150

respondents from each district. The detailed sampling plan has been presented in the following

table.

Table 2.1: Sample size

S.No. District Name Sample size

1 Ananthapuramu 150

2 Chittoor 150

3 Kurnool 150
4 Y.S.R.Kadapa 150

Total 600

The following criteria have been used for selecting select commodities

1) The commodities contracts based on the volume of trade in Rayalaseema region of A.P has

been considered.

2) Based on the awareness level and volume of trade (highest in study area) Turmeric and

Cotton from agricultural commodities and Gold & Silver from non-agricultural commodities

have been chosen.

2.10 TOOLS OF ANALYSIS

The statistical tools used to carry out the above said analysis are given below. The mean scores,

frequencies, percentages for all the variables used in the study are calculated. The nature of

distribution of the variables examined in the study could be assessed from mean scores and chi-

square tests of the same.

2.11 LIMITATIONS OF THE STUDY

The data used in this study are collected from websites like www.fmc.gov.in,

www.mcxindia.com and www.ncdex.com without examining their accuracy and correctness

any further.

There is also possibility of personal bias on the part of the investor that influences the study

in case of primary data.

2.12 CHAPTERIZATION

The present study consists of six chapters as mentioned below:

Chapter-I: Chapter one is introductory in nature and it deals with the concept of Derivative,

Origin of derivatives, History of derivatives, growth and development of commodity market in

India and the types of derivatives and the participants of derivatives market.

Chapter-II: This chapter is exclusively devoted for Review of Literature and research

methodology of the study, which includes the need for the study, objectives of the study,

methodology of the study, sample design of the study, scope and limitations of the study.

Chapter-III: The third chapter entitled “An Overview of Forward Market Commission”. This

chapter specifically focuses on Functions of FMC, Structure of FMC, major initiates taken by the

Government and Commission for the regulation of derivative market and the developmental

activities of FMC and also in detailed profile of select commodities.

Chapter-IV: The fourth chapter entitled “Socioeconomic profile of derivative Investors in

Rayalaseema region of Andhra Pradesh” is organized into two parts. The first part deals with the

socio economic scenario of Rayalaseema region covering the aspects like demographic

distribution, climate condition, land utilization etc., and the other part deals with the socio-

economic profile of sample respondents covering the aspects like age-wise distribution,

education-wise distribution, occupation-wise and income-wise distribution.

Chapter-V: Fifth chapter named as “Investment Behavior of Derivative Investors” analyses the

behaviours of derivative investors in terms of percentage of income invested, awareness levels

on commodity trading, periodicity of contracts, selection process of agricultural and non-

agricultural commodities and objectives of choosing agricultural and non-agricultural

commodities and many more behavioural aspects.

Chapter-VI: The sixth chapter labeled as “Risk perceptions of derivative investors” discusses

the methods of analyzing the types of risk involved in derivative market and various factors

which influence risk tolerance levels.

Chapter-VII: The last and final chapter presents the summary and conclusion emerging from

the present research study.

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