Maturity Effect in Commodity Market: Empirical Evidences from Multi-Commodity Exchange (MCX)
Keywords:
Price volatility, Commodity futures, Maturity period of futures contract, Samuelson hypothesisAbstract
The current paper examines the maturity effect which states that “the futures prices volatility increases as the futures contract approaches its maturity period”. As per maturity effect theory, when a contract approaches its delivery date, the flow of information affects the prices. The paper studies the maturity effect in 12 futures commodities (crude oil, natural gas, silver, gold, aluminium, zinc, copper, lead, nickel, cotton, mentha oil and cardamom) belonging to four segments (energy, bullion, base metal and agriculture) of the Indian Commodity Market. This paper examines all the futures contracts that matured during the year 2020. The data has been collected from the official website of the Multi-Commodity Exchange (MCX). This paper applies ordinary least squares (OLS) regression to examine the maturity effect and uses daily settlement prices for the analysis. The empirical results of the relationship of maturity effect and price volatility indicate that there is the influence of maturity effect in the selected commodities for certain maturity periods. In Multi commodity exchange, 22.21 % contracts satisfied the condition for Samuelson hypothesis, and price volatility of these contracts affected by the numbers of days left for its expiration. Empirical evidence also depicts that in base metal futures commodities, all the contracts with a maturity period of 121-150 days’ exhibits a maturity effect. The study of volatility concerning time to maturity helps one in constructing a hedging strategy, its effectiveness and deciding a suitable hedge ratio.
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