Research Journal of Commerce & Behavioural Science - RJCBS

Test of Pricing Efficiency and Distributional
Properties: Indian Commodity Market
Prof. Sanjay Sehgal
Associate Professor in Department of Commerce at Sri Aurobindo College (M), University of Delhi,
Dr. Namita Rajput
Professor of finance in Department Of Financial Studies, south campus at University of Delhi
Abstract— In this paper we perform the test of random walk
for Indian Commodity Market. Spot price data is used for
thirteen commodities from 2006-2011.We find that daily
commodity returns are not normally distributed and exhibit
short term serial dependence which can be exploited by
technical traders. Commodity return parameters such as mean
returns and volatility do not vary significantly across
commodity classes i.e. agriculture, metal and energy. Further
commodity return characteristics are sensitive to observation
frequency and tend to follow a random walk on monthly
observation hence commodity traders, investors and
researchers shall find more appropriate to work on low
frequency data. The study contributes to both market
efficiency and alternate Asset literature of emerging markets.
Index Terms— Weak-form market efficiency, emerging
market, Indian commodity Markets, trading strategies,
observation frequency.
Jel Codes: G14, G15, C12, C14, C46.
F
I. INTRODUCTION
luctuations in commodity prices are of interest
because they affect the decisions taken by producers and
consumers; they play a crucial role in commodity-related
investments, project appraisals, and strategic planning; and
they reflect and influence general economic activity. The
ability to accurately forecast the price of these various
natural resource products is therefore an important concern
in both policy and business circles. The Efficient Markets
Hypothesis (EMH) states that an efficient capital market is
one in which security prices adjust rapidly to the arrival of
new information, and therefore, the current prices of
securities reflect all information about them (FAMA 1970).
Three sets of assumptions imply an efficient capital market:
(a) new information regarding securities come to the market
in a random fashion, and the timing of one announcement is
generally independent of others, (b) an efficient market
requires that a large number of competing profit-maximizing
participants analyze and value securities, each independently
of others, (c) the competing investors attempt to adjust
.
Dr. Namita Rajput is an Associate Professor in Department of Commerce
at Sri Aurobindo College (M), University of Delhi, India (phone: +91-
9312180054; +91-8285888860; e-mail: drnamitarajput@ymail.com).
Prof. Sanjay Sehgal is a Professor of finance in Department Of
Financial Studies, south campus at University of Delhi, India, ESC-PAU,
France, (e-mail: sanjayfin15@yahoo.co.in).
security prices rapidly to reflect the effect of new
information. Although the price adjustment may be
imperfect, it is unbiased. This means that sometimes the
market will under-adjust or over-adjust, but an investor
cannot predict which will occur at any given time. The main
corollary of the idea that markets are efficient is that price
movements do not follow any patterns or trends; hence past
price movements cannot be used to predict future prices.
Rather, prices follow what is known as a ‘random walk’, an
intrinsically unpredictable pattern i . If we believe that
efficient market hypothesis is a valid proposition, then the
current asset prices should reflect all generally available
information. The efficient market hypothesis implies that
since market prices reflect all available information,
including the information about the future, the only
difference between the prices at Pt and Pt+1 are events that
we cannot possibly predict, i.e. a random event. Hence, in an
efficient market, stock prices can be statistically tested for
random walk hypothesis.
Recently the efficient markets hypothesis and the notions
connected with it have provided the basis for a great deal of
research in financial economics. Voluminous literature has
developed supporting this hypothesis. Briefly stated, the
EMH claims that asset prices are rationally related to
economic realities and always incorporate all the
information available to the market. This implies the
absence of exploitable excess profit opportunities. The EMH
has received a lot of empirical support in the academic
literature during seventies and eighties. This line of thought
has always been viewed with a lot of skepticism in the
professional community, which led to the use of charts and
technical analysis rules for trading strategies in markets.
Numerous researchers conducted empirical studies in
testing weak-form efficiency for several stock markets and
employed various techniques but the empirical evidence is
controversial. There is a substantial body of literature on
market efficiency and stock return behavior, but similar
research for commodity market is limited. Mainly the
studies are concentrated in the developed stock markets
particularly US market. However, the needs of more
research in the emerging and less developed markets are
well recognized, especially in commodity market.
EMH can be tested in various forms; most common are
“Weak Form” tests in which the set of available information
is simply the history of market prices. Rejection of
hypothesis requires the researchers to demonstrate
dependencies in the history of prices which can be profitably
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