Empirical Investigation of Spot and Future Prices of Refined Soy Oil and RM Seed: Unveiling Price Discovery and Volatility Spillover Dynamics

Abstract

Indian agricultural commodity market is subjected to price volatility due to several domestic and global variables causing price risk to farmers, traders, and consumers. This research paper investigates the price discovery and volatility spillover between spot and future prices of refined soy oil and RM seeds traded on the National Commodity and Derivative Exchange (NCDEX) over ten years from 2011 to 2021. The study has used advanced econometric models for estimating cointegration, Granger causality and volatility spillover among the two markets. The results of Johansen cointegration test indicate a long-run cointegration whereas pair wise Granger causality test reveals a bi-directional casual relationship between the spot and future prices of select commodities. The ARCH model has been employed to establish the presence of time varying conditional volatility and persistence of volatility shocks, confirming the presence of ARCH effect which is a precondition for using GARCH model. The estimates of diagonal BEKK-GARCH model reveal a significant volatility spillover effect between the spot and future prices of refined soy oil and RM seed. The findings highlight the need for transparency and efficiency in the Indian agricultural commodity market to protect the interests of producers, investors and other stakeholders.