Random Walk and Price Convergence in the Commodities Market in India

Abstract

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This paper investigates whether the commodities market in India follows the random walk process and whether they deviate from the random walk theory (mean reversion). Daily log returns of commodity future index (MCXCOMDEX) and three sectoral indices are examined using the Augmented Dickey-Fuller test (ADF), GARCH, and E-GARCH model to test the random walk theory. This study confirms the existence of random walk for commodity index prices over the period January 2009 to December 2020. ADF test is used for investigating random walk behaviour. From the ADF test we conclude that the series has unit root problem and the index series is non-stationary. The results clearly show that the data is non-stationary possessing a unit root. The GARCH model was used to cater for volatility clustering, which is more pronounced in commodity prices. From the results obtained, it is observed that futures prices are showing volatility clustering and non-stationarity behaviour, which is in line with our research objective of finding the random walk in commodity index; there is a positive result of the existence of random walk.

Keywords: Random Walk, Commodity Market, GARCH, ADF, Stationarity, Cointegration, Johansen

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