Top

Published in:

2022 | OriginalPaper | Chapter

Financialization of Commodity Market in India: Implications for Intragroup Investing

Authors : Ipsita Saishree, Puja Padhi

Published in: Studies in International Economics and Finance

Publisher: Springer Singapore

Activate our intelligent search to find suitable subject content or patents.

search-config

AI-assisted search

Off

Abstract

This study examines the intragroup co-movement pattern among the daily returns of base metals, precious metals and energy commodity futures in the Indian commodity market using the dynamic conditional correlation method. It intends to verify, whether commodity futures in India are financialized enough to move in unison despite the differences in individual factors like demand, supply, production process and usage. The results of the study confirm that returns of base metals futures and precious metals futures exhibit higher unison than energy futures, thus marking energy futures most favourable for potential diversification benefits. The measure of hedging effectiveness align with the correlation estimates. Additionally, we also conduct a demand–supply analysis of the underlying physical commodities and find that higher co-movements are observed within metal futures and energy futures when their spot market prices are lower often occurring due to low demand/high inventories and vice versa.

Dont have a licence yet? Then find out more about our products and how to get one now:

Springer Professional "Wirtschaft+Technik"

Online-Abonnement

Mit Springer Professional "Wirtschaft+Technik" erhalten Sie Zugriff auf:

über 102.000 Bücher
über 537 Zeitschriften

aus folgenden Fachgebieten:

Automobil + Motoren
Bauwesen + Immobilien
Business IT + Informatik
Elektrotechnik + Elektronik
Energie + Nachhaltigkeit
Finance + Banking
Management + Führung
Marketing + Vertrieb
Maschinenbau + Werkstoffe
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

inform now

Springer Professional "Wirtschaft"

Online-Abonnement

Mit Springer Professional "Wirtschaft" erhalten Sie Zugriff auf:

über 67.000 Bücher
über 340 Zeitschriften

aus folgenden Fachgebieten:

Bauwesen + Immobilien
Business IT + Informatik
Finance + Banking
Management + Führung
Marketing + Vertrieb
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

inform now

previous chapter Determinants of Bitcoin Price: Evidence from Asymmetrical Analysis

next chapter Long Memory and Correlation Structures of Select Stock Returns Using Novel Wavelet and Fractal Connectivity Networks

Available only for authorised users

Global Markets issue on ‘An Investor Guide To Commodities’ by Deutsche Bank (April 2005) https://faculty.fuqua.duke.edu/~charvey/Teaching/BA453_2006/DB_An_investors_guide.pdf. See Commodities As A Strategic Investment for PGGM (Beenen, 2005).

Large inflow of investment capital to commodity futures markets. For details, refer to Domanski and Heath (2007)

Adams, Z., & Glück, T. (2015). Financialization in commodity markets: A passing trend or the new normal? Journal of Banking & Finance, 60, 93–111. https://doi.org/10.1016/j.jbankfin.2015.07.008CrossRef

Adhikari, R., & Putnam, K. J. (2020). Comovement in the commodity futures markets: An analysis of the energy, grains, and livestock sectors. Journal of Commodity Markets, 18, 100090. https://doi.org/10.1016/j.jcomm.2019.04.002CrossRef

Aloui, R., Aïssa, M. S., Hammoudeh, S., & Nguyen, D. K. (2014). Dependence and extreme dependence of crude oil and natural gas prices with applications to risk management. Energy Economics, 42, 332–342. https://doi.org/10.1016/j.eneco.2013.12.005CrossRef

Bollerslev, T. (1990). Modelling the coherence in short-run nominal exchange rates: A multivariate generalized arch model. The Review of Economics and Statistics, 72(3), 498. https://doi.org/10.2307/2109358CrossRef

Bollerslev, T., Engle, R. F., & Wooldridge, J. M. (1988). A Capital asset pricing model with time-varying covariances. Journal of Political Economy, 96(1), 116–131. https://doi.org/10.1086/261527CrossRef

Brennan, M. J. (1976). The supply of storage. The Economics of Futures Trading, 100–107. https://doi.org/10.1007/978-1-349-02693-7_5

Chatnani. (2010). Commodity markets (1st ed.). Tata McGraw-Hill Education.

Chng, M. T. (2009). Economic linkages across commodity futures: Hedging and trading implications. Journal of Banking & Finance, 33(5), 958–970. https://doi.org/10.1016/j.jbankfin.2008.10.006CrossRef

Cristiano, C., & Naldi, N. (2014). Keynes’s activity on the cotton market and the theory of the ‘normal backwardation’: 1921–1929. The European Journal of the History of Economic Thought, 21(6), 1039–1059. https://doi.org/10.1080/09672567.2014.966127CrossRef

Dangi, V. (2014). Role of commodity market in price discovery mechanism in India: A study of silver. Business Perspectives and Research, 2(2), 15–24. https://doi.org/10.1177/2278533720140203CrossRef

Daskalaki, C., & Skiadopoulos, G. (2011). Should investors include commodities in their portfolios after all? New evidence. Journal of Banking & Finance, 35(10), 2606–2626. https://doi.org/10.1016/j.jbankfin.2011.02.022CrossRef

Domanski, D., & Heath, A. (2007). Financial investors and commodity markets. BIS Quarterly Review. https://www.bis.org/publ/qtrpdf/r_qt0703g.htm

Engle, R. (2002). Dynamic conditional correlation. Journal of Business & Economic Statistics, 20(3), 339–350. https://doi.org/10.1198/073500102288618487CrossRef

Epstein, G. (2001, December). Financialization, rentier interests, and central bank policy [conference session]. In PERI Conference on “Financialization of the World Economy”, University of Massachusetts. https://peri.umass.edu/fileadmin/pdf/financial/fin_Epstein.pdf

Gorton, G., & Rouwenhorst, K. G. (2004). Facts and fantasies about commodity futures. https://doi.org/10.3386/w10595

Gupta, S., Choudhary, H., & Agarwal, D. (2017). Hedging efficiency of Indian commodity futures. Paradigm, 21(1), 1–20. https://doi.org/10.1177/0971890717700529.

Hammoudeh, S. M., Ewing, B. T., & Thompson, M. A. (2008). Threshold cointegration analysis of crude oil benchmarks. The Energy Journal, 29(4). https://doi.org/10.5547/ISSN0195-6574-EJ-Vol29-No4-4

Irwin, S. H., & Sanders, D. R. (2011). Index funds, financialization, and commodity futures markets. Applied Economic Perspectives and Policy, 33(1), 1–31. https://doi.org/10.1093/aepp/ppq032CrossRef

Jain, A., & Ghosh, S. (2013). Dynamics of global oil prices, exchange rate and precious metal prices in India. Resources Policy, 38(1), 88–93. https://doi.org/10.1016/j.resourpol.2012.10.001CrossRef

Kaldor, N. (1939). Speculation and economic stability. The Review of Economic Studies, 7(1), 1. https://doi.org/10.2307/2967593CrossRef

Ku, Y. H., Chen, H., & Chen, K. (2007). On the application of the dynamic conditional correlation model in estimating optimal time-varying hedge ratios. Applied Economics Letters, 14(7), 503–509. https://doi.org/10.1080/13504850500447331

Kumar, D. (2014). Return and volatility transmission between gold and stock sectors: Application of portfolio management and hedging effectiveness. IIMB Management Review, 26(1), 2. https://doi.org/10.1016/j.iimb.2014.01.003

Krippner, G. R. (2005). The financialization of the American economy. Socio-Economic Review, 3(2), 173–208. https://doi.org/10.1093/ser/mwi008CrossRef

Kumar, D., & Maheswaran, S. (2013). Correlation transmission between crude oil and Indian markets. South Asian Journal of Global Business Research, 2(2), 211–229. https://doi.org/10.1108/SAJGBR-08-2012-0104CrossRef

Ma, Y., Ji, Q., Wu, F., & Pan, J. (2021). Financialization, idiosyncratic information and commodity co-movements. Energy Economics, 94, 105083. https://doi.org/10.1016/j.eneco.2020.105083CrossRef

Mahalik, M., Acharya, D., & Suresh Babu, M. (2014). Price discovery and volatility spillovers in futures and spot commodity markets. Journal of Advances in Management Research, 11(2), 211–226. https://doi.org/10.1108/JAMR-09-2012-0039

Marzo, M., & Zagaglia, P. (2008). A note on the conditional correlation between energy prices: Evidence from futures markets. Energy Economics, 30(5), 2454–2458. https://doi.org/10.1016/j.eneco.2008.01.007CrossRef

Mishra, B. R., Pradhan, A. K., Tiwari, A. K., & Shahbaz, M. (2019). The dynamic causality between gold and silver prices in India: Evidence using time-varying and non-linear approaches. Resources Policy, 62, 66–76. https://doi.org/10.1016/j.resourpol.2019.03.008CrossRef

Natanelov, V., Alam, M. J., McKenzie, A. M., & Van Huylenbroeck, G. (2011). Is there co-movement of agricultural commodities futures prices and crude oil? Energy Policy, 39(9), 4971–4984. https://doi.org/10.1016/j.enpol.2011.06.016CrossRef

Palley, T. I. (2007). Financialization: What it is and why it matters. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.1077923CrossRef

Panagiotidis, T., & Rutledge, E. (2007). Oil and gas markets in the UK: Evidence from a cointegrating approach. Energy Economics, 29(2), 329–347. https://doi.org/10.1016/j.eneco.2006.10.013CrossRef

Pindyck, R., & Rotemberg, J. (1988). The excess co-movement of commodity prices. NBER working paper series. https://doi.org/10.3386/w2671

Prokopczuk, M., Wese Simen, C., & Wichmann, R. (2021). The dynamics of commodity return comovements. Journal of Futures Markets. https://doi.org/10.1002/fut.22222CrossRef

Sehgal, S., Ahmad, W., & Deisting, F. (2015). An investigation of price discovery and volatility spillovers in India’s foreign exchange market. Journal of Economic Studies, 42(2), 261–284. https://doi.org/10.1108/jes-11-2012-0157CrossRef

Sensoy, A. (2013). Dynamic relationship between precious metals. Resources Policy, 38(4), 504–511. https://doi.org/10.1016/j.resourpol.2013.08.004CrossRef

Sensoy, A., Hacihasanoglu, E., & Nguyen, D. K. (2015). Dynamic convergence of commodity futures: Not all types of commodities are alike. Resources Policy, 44, 150–160. https://doi.org/10.1016/j.resourpol.2015.03.001CrossRef

Serletis, A. (1994). A cointegration analysis of petroleum futures prices. Energy Economics, 16(2), 93–97. https://doi.org/10.1016/0140-9883(94)90002-7CrossRef

Serletis, A., & Herbert, J. (1999). The message in North American energy prices. Energy Economics, 21(5), 471–483. https://doi.org/10.1016/s0140-9883(99)00015-8CrossRef

Serletis, A., & Rangel-Ruiz, R. (2004). Testing for common features in North American energy markets. Energy Economics, 26(3), 401–414. https://doi.org/10.1016/j.eneco.2004.04.007CrossRef

Tang, K., & Xiong, W. (2012). Index investment and the Financialization of commodities. Financial Analysts Journal, 68(6), 54–74. https://doi.org/10.2469/faj.v68.n6.5CrossRef

Tong, B., Wu, C., & Zhou, C. (2013). Modelling the co-movements between crude oil and refined petroleum markets. Energy Economics, 40, 882–897. https://doi.org/10.1016/j.eneco.2013.10.008CrossRef

Vacha, L., & Barunik, J. (2012). Co-movement of energy commodities revisited: Evidence from wavelet coherence analysis. Energy Economics, 34(1), 241–247. https://doi.org/10.1016/j.eneco.2011.10.007CrossRef

Westgaard, S., Estenstad, M., Seim, M., & Frydenberg, S. (2011). Co-integration of ICE gas oil and crude oil futures. Energy Economics, 33(2), 311–320. https://doi.org/10.1016/j.eneco.2010.11.010CrossRef

Working, H. (1948). Theory of the inverse carrying charge in futures markets. Journal of Farm Economics, 30(1), 1. https://doi.org/10.2307/1232678CrossRef

Title: Financialization of Commodity Market in India: Implications for Intragroup Investing
Authors: Ipsita Saishree
Puja Padhi
Publisher: Springer Singapore
Book: Studies in International Economics and Finance
Print ISBN: 978-981-16-7061-9

Electronic ISBN: 978-981-16-7062-6

Copyright Year: 2022
DOI: https://doi.org/10.1007/978-981-16-7062-6_29