Global Financial Crisis and Price Risk Management in Gold Futures Market at MCX, India

Authors: 
Archana Singh
JEL codes: 
C22 - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models, G01 - Financial Crises, G14 - Information and Market Efficiency; Event Studies, Q02 - Global Commodity Crises.
Abstract: 
Over the globe, gold is one of the most traded commodity. In India, gold is traded in both spot and futures market. Price risk management is a fundamental but vital function of futures market. To effectively discharge this function, futures market has to be efficient. Thus, it is important to analyze efficiency of futures market. None of the studies in literature analyses price risk management role of gold futures in India with reference to global financial crisis of 2008-09. Thus, this study aims at investigating the gold futures role in managing price risk related to gold spot market before and after the crisis. The results of Johansen’s Cointegration test indicate that the gold spot and futures markets are cointegrated in both the sub-periods. Granger causality test results show that there is bidirectional causality between spot and futures gold market. In signifies that gold futures play an important role in price discovery with some feedback from spot market in both sub-periods. However, the price discovery role of gold futures markets has strengthened after the crisis. Thus, we conclude that gold futures performs price risk management function in pre and post–crisis periods at Multi Commodity Exchange (MCX), India. The results of this study are crucial to the market participants like companies in gold industry, importers/exporters and jewelers can take position in gold futures market (buy or sell gold futures) to hedge their spot market position and hence manage price risk associated with trading in gold.
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