A Phasewise Empirical Analysis of Relationship between Indian Spot and Future Prices of Gold

Abstract

The study investigates the relationship between the spot and the futures prices of gold commodity. The objectives of the study are examined by employing Chow test to check structural break points in prices data, ADF test to check the stationarity, Johansen Co-integration test for studying the long term relationship, and Granger causality Wald test to know the cause and effect relationship between spot and the future prices of gold. The daily closing data is taken from 1st May 2005 to 31st December 2012 for the analysis. Since the period of financial crisis is considered, the entire period (May 2005- December 2012) is divided into three sub-periods, namely before crisis period (May 2005-August 2008), during crisis (September 2008-December 2010) and after crisis period (January 2011 - December 2012). The findings of the study proved that there are structural break points in the specified data and the series derived from the futures prices and cash market prices for gold were not stationary in the level form, but there is evidence of stationarity in the first difference form. Long run relationship between the spot and future price series is also observed. Empirical results also found the existence of uni-directional causality from spot return to futures return for before crisis and after crisis period. For the period during crisis, there is bi-directional feedback from futures return to spot return and from spot return to futures return.

Keywords: Gold, Spot prices, future prices, ADF, Chow Test, Johansen’s Co-Integration, Granger Causality Test

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