DO STOCK MARKET AND COMMODITY DERIVATIVES MARKET INDICES INTEGRATE IN INDIA? – AN EMPIRICAL STUDY TO FACILITATE BETTER PORTFOLIO-DIVERSIFICATION

Abstract

In assessing the relationship between stock and commodity derivatives markets in India, after the outbreak of COVID-19 pandemic, the empirical analysis suggests that the two markets do not cointegrate in the long-run. However, in the short-run, a unidirectional causal relationship is found from the stock market to the commodity derivatives market. It implies that there remains information asymmetry in two markets. The stock market is found to have outperformed the commodity derivatives market in respect of market efficiency as the information is incorporated in the stock market first and then gets reflected in the commodity derivatives market. Though, the ideal scenario in an economy is that all the financial markets harmonize i.e. the related information is incorporated in the concerned instruments instantaneously, leaving no scope for arbitraging. Therefore, the policymakers must address the issue to ensure smooth and robust functioning of these financial markets. However, the investors, on the other hand, find it as an opportunity to augment their portfolios with commodity derivative instruments to avail off the benefits of diversification. Making the investors aware regarding the functioning and thereby increasing their participation in the commodity derivatives market would bring possible harmonization in the two markets gradually in the future.