The Impact of Future Trading on Volatility in Agriculture Commodity: A Case of Pepper.

Black pepper is known as a flowering vine in the family Piperaceae. While Vietnam is the largest producer and exporter of pepper in the world, producing almost one-third of the world's pepper crop, India produces 19% of the world's demand for pepper. In India, Kerala and Karnataka account for more than 95% of the pepper production. Indian pepper is of superior quality and is traded at a premium rate in international markets. In the present paper, spot returns of pepper volatility is modeled as a GARCH(1, 1) process using data from 2004 to 2013. GARCH(1, 1) model is used to study the relationship between spot volatility and unexpected futures trading activity, while Granger causality test is used for examining the causality flows from Unexpected Traded Volume (UTV) to spot volatility and unexpected open interest to spot price return. Therefore, whenever there is high unexpected fluctuation in the level of futures trading volume, the volatility of spot prices increases, indicating the destabilizing impact of futures trading. The augmented GARCH model reports positive relationship between UTV and spot returns volatility. The study obsoletes presence of excessive speculation manipulated trading which is a concern for regulators, genuine hedgers and government. Regulators need to take steps for checking speculation in pepper future market. Fluctuation in spot price is due to unexpected trading of hedgers. [ABSTRACT FROM AUTHOR]