Impact of futures trading on spot market: an analysis in context of Indian Rubber
Student name: Ms Akanksha Gupta
Guide: Dr Poornima Varma
Year of completion: 2012
Host Organisation: TERI University
Abstract: In this study an attempt has been made to appraise the impact of futures trading on spot markets
of rubber. This impact is investigated by examining the price discovery role of futures markets,
the direction of volatility spillovers between the futures and spot markets and the relationship
between the futures trading activity and the spot price volatility of rubber. Causality relationships
between the rubber prices in the spot and futures markets, rubber price volatilities in the spot and
futures market and finally the futures trading activity in rubber and its spot price volatility are
assessed using a standard pairwise Granger causality test. The results of the analysis suggests
that there is a stronger information flow from the future markets to the spot markets which is an
implication of the price discovery happening in the rubber futures markets. A GARCH analysis
confirms the volatility persistence in the two markets. The Granger causality test between price
volatilities conveys that there exists a bidirectional volatility spillover in the two markets. Also,
the Granger causality between futures trading activity and the spot volatility implies that the spot
price volatility is both a cause as well as a consequence of futures trading activity in rubber.
