Application of Variance Decomposition Model in Pricing Analysis of Agriculture Commodity Spot and Future Market
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Abstract
India's commodity markets are expanding quickly because of globalisation, which began in earnest in 1991. These markets underwent significant evolution in conjunction with other financial markets due to changes in legislation, such as SEBI controlling regulation of commodity market of India in 2015. The objective of the paper is to compare spot and futures pricing to seek price discovery for the selected commodities, which were only used in the agricultural industries. The present paper emphasized the causality direction amongst the spot-futures pricing. In this investigation, secondary quantitative data were used. The data was gathered through the website, annual reports, and the Bloomberg Database. The data was collected in the form of a time series with a daily frequency. The study covered a variety of agricultural goods, including guar gum, chana, guar seed, jeera, coriander, soybean, barley, turmeric, castor seed and wheat. A VAR model and models for variance decomposition are applied to analyze data. The empirical analysis demonstrated that spot markets controlled most agricultural commodities when compared to their future markets. Any new information that affected market pricing for agricultural commodities was reflected in the spot prices, which also affected the pricing of the commodities in the future.
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