Price Discovery in Commodity Futures Market: A Study on Indian Bullion (Precious Metal) Market

Abstract

Bullions (precious metals) i.e. gold and silver are highly sought in India due to their industrial usage as well as for the domestic demand by the common people owing to passion of owning. Commodity futures contract of precious metals play an important role in risk management. This study attempts to present the recent developments in Indian commodity futures market along with the assessment of price discovery, both in spot and the futures market, of the precious metals. Co-integration technique and the Vector Error Correction Model have been applied on the daily spot and the futures price data of these two precious metals. Both the spot and the futures market have been found co-integrated. The futures market is found to play pivotal role in price discovery may be due to technological advancement. The related information is incorporated in the futures price first and then adjusted in the spot price to reach to equilibrium.