Price discovery mechanism and dynamic relationship between spot and future prices of sugar in India

This study examines price discovery mechanism and dynamic relationship between spot and futures prices of sugar in India. To understand the short and long run relationship between these, monthly data of sugar prices were used. The relationship between spot and futures prices for sugar has been analyzed. Augmented Dickey-Fuller (ADF) test, Johnson co-integration test, vector error correction model and Granger causality test were employed to understand the price discovery mechanisms and relationships. The analysis reveals that spot price series adjust to changes in the futures price series in the same period. The commodity futures market is efficient for sugar. There was a long run relationship between futures and spot prices and the adjustment towards equilibrium was made by futures prices. The error correction coefficient suggests that a sustainable long-term equilibrium is achieved by closing the gap between futures and spot prices.