Commodity Futures Market in India: Hedging Efficiency

Abstract

This research article investigates the hedging effectiveness of commodity futures contract for 6 Agricultural and 4 Non-Agricultural commodities with different maturity time horizons, i.e., nearby month and next to nearby month. Data from year 2009 to 2013 is taken into consideration. The risk management role of Indian commodity futures market is examined by estimating constant and dynamics hedging ratios using Ordinary Least Squares (OLS) regression and Vector Error Correction Model (VECM). The result of hedging effectiveness suggested that a slight variation in hedging performance between nearby month and next to nearby month maturities is found in the case of both Agricultural and Non-Agricultural commodities. Further, there is not much difference in the estimates of hedging effectiveness obtained from OLS method and ECM The results are not very encouraging for non-agricultural commodities.