LEAD LAG RELATIONSHIP BETWEEN GOLD FUTURES AND SPOT PRICES PRESENTED BY DR. D. LAZAR READER DEPARTMENT OF COMMERCE SCHOOL OF MANAGEMENT PONDICHERRY UNIVERSIY PONDICHERRY – 605014 EMAIL: dlazar. com@pondiuni. edu. in
Derivatives and Futures • Derivatives are financial security such as an option or future whose value is derived in part from the value and characteristics of another security, the underlying asset. • Future contracts is an agreement made and traded on the exchange between two parties to buy or sell a commodity at a particular time in the future for a predefined price
Advantages and Disadvantages * The producer realizes the greatest return with this marketing alternative. • No premium charge is associated with futures market contracts. • Subject to margin calls • Unable to take advantage of favourable price moves • Net price is subject to Basis change
World Gold Markets London as the great clearing house New York as the home of futures trading Zurich as a physical turntable Istanbul, Dubai, Singapore and Hong Kong as doorways to important consuming regions. Tokyo where TOCOM sets the mood of Japan Mumbai under India's liberalized gold regime
India in World Gold Industry (Rounded Figures) India (In Tons) World (In Tons) % Share Total Stocks 13000 145000 9 Central Bank holding 400 28000 1. 4 Annual Production 2 2600 0. 08 Annual Recycling 100 -300 1100 -1200 13 Annual Demand 800 3700 22 Annual Imports 600 Annual Exports 60
Indian Gold Market • Gold is valued in India as a savings and investment vehicle and is the second preferred investment after bank deposits. • In July 1997 the RBI authorized the commercial banks to import gold for sale or loan to jewellers and exporters. • The gold hoarding tendency is well ingrained in Indian society. • In the cities gold is facing competition from the stock market and a wide range of consumer goods. • Facilities for refining, assaying, making them into standard bars in India, are insignificant, both qualitatively and quantitatively.
GOLD A very ductile and malleable, brilliant yellow precious metal that is resistant to air and water corrosion. • • In the cities gold is facing competition from the stock market and a wide range of consumer goods. • In rural areas it is a preferred and secured Investment. • Last few years the prices of gold has soured to high and never showed the declining path. • It is generally accepted and believed by every one that it is due to prices in derivative markets that the spot market prices have gone up. • It is also, understood and widely believed by every one in the Gold market is that the prices will never come down below Rs. 800 per gram. • This condition has made the researchers to look into the price behaviour of Gold
Review of Literature 1. Future and Spot Market of Financial Assets • • Ser-Huang Poon and Clive W. J. Granger(2003) Kalok Chan, K. C. Chan and Andrew Karolyi (1991) Antonios Antonion and Ion Garett (1993) Hendrik Beesembinder and Paul C. Seguin (1992) Hans R. Stoll and Robert E. Walley (1990) Ira G. Kawaller, Paul D. Koch and Timothy W. Koch(1987) Hun Y. Park (1991) Susan J. Crain and Jae Ha Lee (1996)
Review of Literature. . Cont 1. Future and Spot Market of Commodities – – – – – Kenneth D. Garbade and William L. Silber (1982) Marcus J. Chambers and Roy E. Bailey (1996) Weike Hai, Nelson C. Mark and Yangru Wu (1997) James E. Martin M. D. Feminow Robert W. Golb, Roger A. Morin and Gerald D. Gay (1983) Masahiro Kawai (1983) John Spiriggs, Micheal Keylen and David Bessler(1982) Aris Propopadakis and Hans R. Stoll (1983) Hector O. Zapata and T. Randall Fortenbery (1996)
Review of Literature. . Conclusion • All the papers examining the price discovery role and lead lag relationship between futures and spot prces have to a large extent followed the most common tool to test for * Co-integration, conditioned on the existence of a long run relationship and * single equation error correction models have been specified in order to draw inference about causality
Review of Literature. . Conclusion • Single Equation Error Correction Model is only valid given an exogeneity assumption and • Bivariate specifications cannot in general capture all the relevant information when there are several contract with different time to expiration. • The form of long run relationship between the future and spot prices and particularly if basis is constant so that the prices mover proportionately to each other (Most cases it is assumed)
In the present study…. • This research paper is going to use multivariate framework like the Johansen test to overcome the drawback highlighted above. • The approach will be used to study futures on Gold. Price leadership in the futures market for Gold as well as spot market. • Very few rather only study is available on Gold price out the literature reviewed.
Period of Study • Due to its recent spurt in the market recent three years period daily price is to be considered in the study.
Chapter Organization • First unit will have Introduction • Standard theory on spot-future price relationship is to be presented in Unit two. • Multivariate empirical specifications will be in unit three • Fourth unit would contain data used in the study • Fifth unit would present the result and concluding remarks.
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