The Temporal Lead Lag and Causality between Spot and Futures Markets: Evidence from Multi Commodity Exchange of India
The Temporal Lead Lag and Causality between Spot and Futures Markets: Evidence from Multi Commodity Exchange of India

Summary/Abstract: The current surge of soaring gold prices has renewed interest on price discovery of competing markets. The purpose of this article is to examine the temporal lead lag and causality between Mini gold spot and futures market by taking daily closing values for both the indices from the sample period June 1st January 2005 to 31st December 2008 for the Multi Commodity Exchange of India (MCX). Data properties were used to determine the stationarity of the spot and futures market variables by using Augmented Dickey Fuller (ADF) and Phillip Perron (PP) tests which indicated that the two series are integrated at I(1). The study employs Johansen’s Cointegration test and Vector Error Correction Model (VECM) for analyzing the long run and speed of equilibrium between the bivariate variables. The findings of the study reveal that, in the long run, both the markets are cointegrated and there exists a causal relationship between these two markets. Finally, the results shows that unidirectional causality is running from spot to futures market in long-run dynamics and spot market serves as a primary market for price discovery.

• Details
• Contents