Price Discovery and Volatility Spillovers in Indian Metal Commodity Markets

Commodity markets have an imperative role in the price stabilization of commodities and contribute incalculably to the economic development of the country. The present study examines the price discovery process and volatility spillover in Indian metals commodity market using Johansen cointegration, Vector Error Correction Model (VECM) and the bivariate EGARCH model. The study uses the data of two bullion commodities i.e. Gold and Silver and five metal commodities i.e. Aluminium, Copper, Lead, Nickel and Zinc taken from MCX India over a period of 2006 to 2016. Results of Johansen cointegration tests confirmed a long-run equilibrium relationship between spot and futures prices for all sample commodities. The results of VECM reveal a bidirectional error correction in all sample commodities with the fact that future market leads the spot market in price discovery mechanism. Gold is the only exception where spot price leads in price discovery process. Granger causality results exhibit bidirectional causality in the spot and futures prices for all the commodities under investigation, thus, confirming that price information flows both ways and hence the bullion and metal commodity market in India is informational efficient. EGARCH results confirm that although bidirectional volatility spillover persists, the volatility spillovers from spot to the futures market are dominant. Overall, the price discovery results are heartening given the emerging character of Indian commodity market. However, the results for volatility spillover are weak, signifying that the efficient risk transfer system is yet to progress for most of the sample commodities.