DETERMINANTS OF FUTURES PRICE VOLATILITY: A STUDY OF AGRICULTURAL MARKET
DETERMINANTS OF FUTURES PRICE VOLATILITY: A STUDY OF AGRICULTURAL MARKET

Summary/Abstract: Research background: Volatility in agricultural prices is a concern for producers and other stakeholders along the food chain for a developing country like India where a significant percentage of population is directly dependent on agriculture for their livelihoods. Price volatility can have a long run impact on the income of producers as it makes it difficult to plan production for future. It affects economically weaker consumers who spend a major portion of their income on food items. Therefore, it is essential to study the determinants of volatility of agricultural commodities. Purpose of the article: The objective of the study is to identify the determinants of volatility in the futures market traded at NCDEX. Methods: Eight agricultural commodities which are traded at NCDEX is selected for the study based on trading volume and open interest. The volatility in the futures prices of the selected commodities were tested for presence heteroscedasticity. The futures price volatility was first estimated using conditional heteroscedasticity models and then regressed with identified variables like time to maturity, volume, open interest, and past volatility. Findings & Value added: From the results it was observed that for five commodities the relationship between time to maturity and volatility is negative and significant. This means as the contract nears maturity, volatility increases which support the presence of Samuelson hypothesis. Further it was found that there is positive and significant relationship between volume and volatility for all the commodities supporting the mixed distribution hypothesis. The relation between open interest and volatility was negative and significant for all the commodities except for soya oil and turmeric. Past volatility has positive and significant relationship with present day volatility that means if the past volatility is high then it is expected that present volatility will also be high. The findings support in risk management of agricultural commodities

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