Analysis of Price Dynamics in Gold Markets in India using Information Share Model

Author : M Ajoy Kumar

Abstract

Gold is one among the most actively traded commodities world-wide. Traditionally India has been one of the biggest consumers of gold. The gold market is very vibrant in India and with the opening up of commodity derivatives trading and establishment of national level online commodity exchanges, gold became one of the commodities on which futures contracts started trading actively. The relationship and price dynamics between the spot and futures markets of assets has attracted lot of research interest as this relationship serves in fulfilling the basic functions of derivatives markets. The current study attempts to analyse the price dynamics between the spot and futures markets for gold in India. The daily price data related to six years is analysed using various econometric tools for understanding the long-run as well as short-run price relationship. Hasbrouck’s Information Share model is used to examine the relative percentage of information share between the markets. It has been found that both the markets are cointegrated and share a long-run equilibrium relationship. The futures market seems to dominate the spot market in the long-run. However, in the short-run, both the markets are assimilating new information almost at a similar rate.

Key words : Price Dynamics, Spot, Future, Cointegration, VECM, Information Share