Futures Market of Pepper in India: An Empirical Study

Abstract

Persistence of agricultural price instability along with farmer’s direct exposure to such fluctuations remains a major concern for policy makers in India. In view of such a feature, the present study attempts to empirically examine the performance and efficiency of pepper futures market for its role of price discovery and risk management functions. The performance assessment methods of extent of liquidity, price volatility and basis risk have been employed as analytical variables. Using the econometrics techniques such as cointegration, VECM, Granger causality, impulse response and variance decomposition, the study seeks to generate empirical results to evaluate the level of development of pepper futures market as an efficient mechanism of risk management and price discovery. Empirical study of the pepper futures market in India indicates that pepper has not done well as performance and efficiency are concern. Looking at the result it can be said that, hedgers find futures market useful to manage price risk and can be very useful in risk management functions. In the presence of an expected increase of price risk, findings of the study would help address the mechanisms of risk management and price discovery of futures market for pepper.