Competency and efficacy of energy futures: empirical investigation from emerging economy

Abstract

Purpose

The purpose of this study is to analyze the price discovery and market efficiency of energy futures traded in India. The study also examines the volatility spillover effect between the cash and futures markets of energy commodities.

Design/methodology/approach

The study uses crude oil and natural gas spot and futures series traded at Multi Commodity Exchange (MCX), India. To evaluate the objectives, the paper employs the cointegration test, causality check, dynamic ordinary least squares (DOLS) method and Baba, Engle, Kraft and Kroner (BEKK) GARCH Model.

Findings

The study supports the long-run association between the selected markets. Unlike natural gas, in the case of crude oil bidirectional, flow of information is observed. The study rejects the unbiasedness and efficient market hypothesis of the energy futures market in India. Further, the study confirms that the selected energy commodities indicate bidirectional shock transmission between their respective cash and futures markets.

Practical implications

The study will assist the commodity market participants in designing their trading strategy. The volatility signal will be used by investors and portfolio managers for risk management and portfolio adjustment. Regulators will be able to anticipate future spillover and can design policies to strengthen the market.

Originality/value

The paper evaluates the three aspects of the energy futures market, namely price discovery, market efficiency and volatility slipover. To the best of the authors’ knowledge, studies on efficacy and shock transmission in the context of the energy futures market in India are rare. Further, the study also contributes by investigating the price discovery process of the energy futures market.

Citation

Samal, L. (2024), "Competency and efficacy of energy futures: empirical investigation from emerging economy", Journal of Economic Studies, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/JES-02-2024-0085