An empirical study on stochastic volatility – evidence from Indian commodity future market

In the context of growing participation in Indian commodity market this paper empirically attempts to study the Indian commodity market futures index return volatility for a period between 2007 to 2013 taking daily closing price of two major commodity exchanges five indices, namely Dhaanya of NCDEX, and COMDEX, METAL, ENERGY and AGRI indices of MCX. ADF test was conducted to verify the unit root of data set and result confirms the stationarity of the time series. Generalized Autoregressive Conditional Heteroscedasticity model was used to estimate the Index volatility. Results show that MCXAGRI index has highest significant stochastic volatility followed by MCXENERGY, MCXCOMDEX and MCXMETAL indicating that the price of the index can change dramatically over a short time period in either direction. Interestingly DHAANYA index has a significant negative stochastic volatility for the period. A lower volatility indicates that value does not fluctuate dramatically, but changes in value at a steady pace over a period of time. This study results facilitates investors in commodity market futures trading risk management activity.