Financial innovation management of volatility spillovers at Indian gold futures market

Authors:
Mallika Mathew1, M. M. Sulphey2
1. Jagannath International Management School (India)
2. College of Business Administration, Prince Sattam Bin Abdulaziz University (Saudi Arabia)
Pages:
131 - 140
Language:
English
Cite as:
Mathew, M., & Sulphey, M. M. (2019). Financial Innovation Management of Volatility Spillovers at Indian Gold Futures Market. Marketing and Management of Innovations, 2, 131-140. http://doi.org/10.21272/mmi.2019.2-12


Annotation

Volatility Spillover refers to the interaction between volatilities of different financial markets and volatilities can transfer between markets. It is generally understood that the volatility process will show the extent to which new information is assimilated by the market. The paper studies financial innovation management of the Volatility Spillover between the Indian Gold Futures and Spot Gold Commodity Market. This study has used the daily price of futures and spot market of Multi Commodity Exchange, Mumbai for a period of seven years from 1st October 2009 to 30th September 2016. The study employs Bivariate Exponential Generalized Autoregressive Conditional Heteroscedasticity (EGARCH) model to investigate innovative management of the volatility spillover dynamics. The Bivariate EGARCH Model result reveals that the GARCH effects are statistically significant, signifying that the degree of volatility persistence exists in the case of both Gold futures and spot market returns. This result indicates that there is a tendency for volatility to continue for long periods in both the markets, once a shock has occurred. The leverage effect parameters are positive and statistically significant for both futures and spot market return, indicating the existence of leverage effect. This indicates that positive shocks have a greater impact on this market than the negative shocks. The spillover coefficients are statistically significant for both futures and spot market return, indicating significant bi-directional spillovers exist across the futures and spot markets of Gold. The result indicates that the investor can use the information of one market to predict the behaviour of the other market. All the available information is reflected in the current price as the market assimilates immediately new information and as a consequence, there are no arbitrage opportunities. In contrast to the widely accepted hypothesis of the futures market, that due to its cost and hedging advantages, the futures market leads the spot market, the Indian Gold Futures market, during the period of study, fails to provide early information to spot market. 


Links
  1. Bhar, R. (2001). Return and Volatility Dynamics in the Spot and Futures Markets in Australia: An Intervention Analysis in a Bivariate EGARCHX Framework. J. Fut. Mark., 21, 833-850.
  2. Bhargava, V., Malhotra, D. K., Russel, P., & Singh, R. (2012). An empirical examination of volatility spillover between the Indian and US swap markets. International Journal of Emerging Markets, 7 (3), 289-304.
  3. Booth, G. G., Martikainen, T., & Tse, Y. (1997). Price and volatility spillovers in Scandinavian stock markets. Journal of Banking & Finance, 21, 811-823.
  4. Chevallier, J., & Ielpo, F. (2013). Volatility spillovers in commodity markets. Applied Economics Letters, 20 (13), 1211-1227.
  5. Ewing, B. T., & Malik, F. (2013). Volatility transmission between gold and oil futures under structural breaks. International Review of Economics and Finance, 25, 113-121.
  6. Feng, S. X., Lin, S. X., & Ho, D. (2003). Spillover Effects in the Malaysian Palm Oil Futures and Cash Markets. Malaysian Journal of Economic Studies.
  7. Greene W H. (1997). Econometric analysis (3rd edition). Engelwood Cliffs, NJ: Prentice Hall
  8. Hong, Y. (2001). A test for volatility spillover with application to exchange rates. Journal of Econometrics, 103, 183-224.
  9. Kaltalioglu, M., & Soytas, U. (2011). Volatility Spillover from Oil to Food and Agricultural Raw Material Markets. Modern Economy, 2, 71-76.
  10. Kanas, A. (1998). Volatility spillovers across equity markets: European evidence, Applied Financial Economics, 8(3), 245-256, DOI: 10.1080/096031098333005
  11. Karmakar, M. (2009). “Price Discoveries and Volatility Spillovers in S&P CNX Nifty Future Its Underlying Index CNX Nifty.” Vikalpa 34 (2), 41-56.
  12. Lahiani, A., & Vo, T. (2013). Understanding Return And Volatility Spillovers Among Major Agricultural Commodities . The Journal of Applied Business Research, 29 (6), 1781-1790.
  13. Lien, D., & Yang, L. (2009). Intraday return and volatility spill-over across international copper futures markets. International Journal of Managerial Finance, 5 (1), 135-149.
  14. Lin, S., & Tamvakis, M. (2001). Spillover effects in energy futures markets. Energy Economics, 23, 43-56. 
  15. Mallika, M. & Sulphey, M. M. (2018). Gold exchange traded fund – price discovery and performance. Scientific Annals of Economics and Business, 65(4), 477-495.
  16. Mallikarjunappa, T., & M, A. E. (2010). Price Discovery Process and Volatility Spillover in Spot and Futures Markets: Evidences of Individual Stocks. Vikalpa, 35 (2).
  17. Mantu, K. M., Debashis, A., & Babu, M. S. (2014). Price discovery and volatility spillovers in futures and spot commodity markets : Some Indian evidence . Journal of Advances in Management Research, 11 (2), 211-226.
  18. Mattos, F., & Garcia, P. (2006). Price Discovery and Risk Transfer in Thinly Traded Markets: Evidence from Brazilian Agricultural Futures Markets. Review of Futures Markets, 14, 471-483.
  19. Mensi, W., Beljid, M., Boubaker, A., & Managi, S. (2013). Correlations and volatility spillovers across commodity and stock markets: Linking energies, food, and gold. MPRA Paper No. 44395. University Library of Munich, German.
  20. Mishra, A. K., Swain, N., & Malhotra, D. K. (2007). Volatility Spillover between Stock and Foreign Exchange Markets: Indian Evidence. International Journal of Business, 12 (3), 343-359.
  21. Nazlioglu, S., Erdem, C., & Soytas, U. (2013). Volatility spillover between oil and agricultural commodity markets. Energy Economics, 36, 658-665.
  22. Pati, P. C., & Rajib P. (2011). Intraday return dynamics and volatility spillovers between NSE S&P CNX Nifty stock index and stock index futures, Applied Economics Letters, 18, 6, 567.
  23. Sehgal, S., Rajput, N., & Florent-Deisting. (2013). Price Discovery And Volatility Spillover:Evidence From Indian Commodity Markets. The International Journal of Business and Finance Research, 7 (3), 57-75.
  24. Sehgal, S., Berlia, N. & Ahmad, W. (2013). An Examination of Price Discovery and Volatility Spillovers of Crude Oil in Globally Linked Commodity Markets. International Journal of Economics & Finance; 5 (5), 15-34. 
  25. Shihabudheen, M. T., & Padhi, P. (2010). Price Discovery and Volatility Spillover Effect in Indian Commodity Market . Indian Journal of Agricultural Economics, 65 (1), 101-117.
  26. Srinivasan, P. (2012). Price Discovery and Volatility Spillovers in Indian Spot-Futures Commodity Market. The IUP Journal of Behavioral Finance, 9 (1), 70-85.
  27. Srinivasan, P., & Ibrahim, P. (2012). Price Discovery and Asymmetric Volatility Spillovers in Indian Spot-Futures Gold Markets. International Journal of Economic Sciences and Applied Research, 5 (3), 65-80.
  28. Sy, M., Li, L., & Nguyen, L. T. (2015). Volatility spillover from soybean oil futures to crude palm oil spot and futures: An empirical evidence. Proceedings of the 5th Conference on Derivative Markets 2015. Auckland, New Zealand.
  29. Thenmozhi, M., & Priya, S. (2008). Volatiity Spillover in Bullion and Energy Futures and Spot Market. Journal of Emerging Financial Markets, 1 (1), 85-108.
  30. Thenmozhi, M., & Thomas, S. M. (2007). Price discovery and volatility spillovers in spot and futures markets: evidence from India. Indian Journal of Capital Market, 4 (2), 1-28. 
  31. Trujillo-Barrera, A., Mallory, M., & Garcia, P. (2012). Volatility Spillovers in U.S. Crude Oil, Ethanol, and Corn Futures Markets. Journal of Agricultural and Resource Economics, 37 (2), 247-262.
  32. Tse, Y. (1999). The Journal of Futures Markets. Price Discovery And Volatility Spillovers In The Djia Index And Futures Markets , 19 (8), 911-930.
  33. Wahab, M. & Lashgari, M. (1993). Price Dynamics and Error Correction in Stock Index and Stock Index Futures Markets: A Cointegration Approach. Journal of Futures Markets. (13) 4, 711-742. 
  34. Wang, P., & Wang, P. (2001). Equilibrium adjustment, basis risk and risk transmission in spot and forward foreign exchange markets. Applied Financial Economics, 11, 127-136.
  35. Wiese, V. (1978). Use of commodity exchanges by local grain marketing organizations. In A. Peck (ed). Views from the trade (Chicago: Board of Trade of the City of Chicago, 1978). 
  36. Wong, K., & Shum, W. (2010). Exchange-traded funds in bullish and bearish markets. Applied Economics Letters, 17 (16), 1615-1624.
  37. Working, H. (1948). Theory of the inverse carrying charge in futures markets. Journal of Farm Economics, 30, 1-28.
  38. Wu, F., Guan, Z., & Myers, R. J. (2011). Volatility spillover effects and cross hedging in corn and crude oil futures. Journal of Futures Markets, 21 (1), 1052-1075.
  39. Xiaoqing, E. X., & Fung, H. G. (2005). Cross market linkages between U.S. and Japanese precious metals futures trading. International Financial Markets, institutions and Money, 15, 107-124.
  40. Yang, J., Yang, Z. & Zhou, Y. (2012), Intraday price discovery and volatility transmission in stock index and stock index futures markets: Evidence from China. J. Fut. Mark., 32, 99-121. DOI:10.1002/fut.20514
  41. Yang, J., Zhang, J., & Leatham, D. J. (2003). Price and Volatility Transmission in international Wheat Futures Market. Annals of Economics and Finance, 4 (1), 37-50.
  42. Zhong, M., Darratt, A. F. and Otero, R. 2004. Price discovery and volatility spillovers in index futures markets: some evidence from Mexico. Journal of Banking and Finance, 28, 3037-54.