Price Discovery and Causality in

Selected Agricultural Commodities - An

Empirical Study

Author:
Dr. Tanushree Sharma
Assistant Professor
NIILM- Centre for Management Studies
Greater Noida
Email : tanu24feb@gmail.com

Introduction
Volatility in six commodities-The Ministry

has already received a report on the price

movements of six agriculture commodities.
These include pepper, potato, soya oil,
soya bean chana and guargum.
India is leading exporter of guar and
contributes about 80% to the world guar
production.
Guargum price has increased 420 times in
2012 in seven months.
We found that there is no correlation
between spot and future prices of Guar.

Objectives To study the co-integration between

Guargum Spot and Future Price.

To plot impulse response function to depict
how Spot or Future price respond to shock
to itself and to the other variable for the
given time period.
To innovate the extent to which a variable
helps in explaining the other variable
through variance decomposition.

Methodology and Data

DATA Source:
Secondary data from Books, Journals & websites NCDEX.

Software used:
E-views 5

Tools used:
Unit Root Tests (Augmented DickeyFuller)
Co-integration Test (Johansen-Juselius Maximum Likelihood Co-integration Test)
Impulse Response Function
Forecast error variance decomposition

Time Period:
Nov. 2006 - March 2012 Daily
Observations included -1579

Data and Preliminary Analysis

Table -I: Descriptive Statistics of Future and Spot
Price Return of Guargum
Spot

Future

Mean

0.001772

0.00176

Median

0.000747

0.001071

Std. Deviation

0.018331

0.019061

Skewness

-0.566717

-1.197724

Kurtosis

19.26262

21.00036

Jarque-Bera

17661.81

21942

Probability

0.0000

0.0000

120000
100000
80000
60000
40000
20000
0
250

500

750

FUTURE

1000

1250

SPOT

Future and Spot Prices before first Difference

1500

.2
.1
.0
-.1
-.2
-.3
250

500

750

DFUTURE

1000

1250

DSPOT

Future and Spot Prices After first

Difference

1500

Empirical Results and Discussions

As a preliminary investigation, Augmented

Dickey Fuller tests was employed to test the

stationarity of spot and future price series of
Guar gum.
The result reveals that both the data series of future

and spot price of Guargum are stationary after first

difference. Table I.docx

Johansens Cointegration test is performed to

examine the long-run relationship between

spot and future markets of Guar gum.
We could not found presence of cointegrating vector

between Future and spot prices of Guar gum.Table

II.docx

We measured Granger causality between

future and spot price of guargum.Table

III.docx
To find more detailed study of VAR model ,

impulse response function and variance

decomposition are estimated. Figure III
illustrates the estimated impulse response
functions for ten days ahead time horizons.
Table IV.docx
The forecast error variance decomposition

provides an alternative way to look at the

finding of the impulse response analysis. It
enables in innovating the extent to which a

Findings No Cointegration Guar gum spot and future price

Impulse

Response function- The shape of the

impulse response graph shows that future market has
a larger response to one standard deviation shocks to
the spot price than the spot responses to future
innovations .

Variance Decomposition- The results of variance

decomposition indicate that the spot market shocks

dominate over future market. A high percentage
changes in forecast error of futures market is
explained by the spot market(57.28%).