Commodity derivatives behaviour in Indian market using arch/garch

Liberalization in commodity markets has brought intense changes in the price of commodities in India. Markets for commodities were made efficient, by introducing derivative contracts like futures. Unlike producers and consumers who trade for hedging purposes, financial firms and other speculators enter the market to benefit from price volatility. In recent times commodity speculation through commodity funds have become increasingly popular financial investment. The markets for trading commodities have become efficient with the setting up of MCX in 2003. MCX COMDEX is the maiden Composite Commodity Index in India based on commodity futures prices of an exchange. This captures diversified sectors including futures contracts on metals, energy and agricultural commodities. This provides market participants with the ability to efficiently hedge commodity and inflation exposure and cease price risk. However, the market participants, regulators and all other stakeholders are always concerned with the price volatility in the commodities market which is dominated by major players. Therefore a pertinent forecast of commodity price indices may prove to be valuable information to the market participants. The study found that Composite commodity Derivative Index (MCX) is influenced by its own past price movements using GARCH (1,1) model.