Meta-Analysis of Efficiency of Indian Spot and Commodity Futures Markets

Abstract

Examination of market efficiency has conventionally being an area of interest to the market participants, analysts, investors and regulators. We find a large number of researches in commodity markets on a global basis covering various aspects of efficiency like macro-economic impact of trading of spot and futures, discovery mechanism of prices, volatility spillover effects. In many developing countries including India, the issue of market efficiency has been mind boggling for researchers since research outcomes are confusing making it extremely difficult to derive reliable implications for the market participants and regulators. The researchers have used a variety of techniques in statistics and econometrics. These include e.g. descriptives, F-ratios and various parametric and non-parametric tests. The econometric estimations include examination of Casualty, Error correction, Integration, Auto regressions, GARCH models etc. It is seen that generalization of results is a complex and difficult task since the results derived show varying behavior and complexity. In Indian markets, our examination of researches reveals that inferences derived therefrom on the issue of efficiency and interrelationships connote a contrasting view. It seems difficult to decide whether the operation of commodity derivatives affects the volatility and efficiency of spot markets and also the trading response. In addition, the macro-impact of commodity derivative trading is an unresolved issue. We analyze the methodologies used in these researches in Indian and other countries to find out the major causes of contrast in the inferences on selected parameters like selection of exchange or asset (commodity), time frames, statistical or econometric technique used. We also analyze the policy responses of the regulators and attempt to suggest a workable solution to solve these problems. We derive that Indian commodity markets are inefficient for majority of commodity sets and the policy response is weak, sub-optimal and haphazard.