Forecasting Volatility In Indian Agri‐Commodities Market

Abstract

The market participants always wonder the use of agriculture futures markets to mitigate risk, as the trading in agricultural commodity not only leads to increasing exposure to external shocks but also raises the uncertainty about the future price movements. The farmers and the consumers generally disfavor the volatility in food markets and consider it as a serious concern; whereas the speculators favor such price fluctuations to profit by predicting which direction prices are headed. Generally such trading activity has an irrational component translated into prices. The unpredictability of food prices is a cause for concern because of the adverse effects it has on the producers as well as the consumers. The agricultural commodity prices all around the world have been substantially sensitive to the movements of macroeconomic indicators in this century. In India, the Dhaanya highlights the importance of agriculture and provides a reliable benchmark for the traded Agri‐commodities. Today, the Investors all over the world consider Agri‐commodities as one of the major asset class and the other indicators like Nifty market index and the Rupee Dollar (US) exchange rate have major influence on the prices of Dhaanya (Mahalakshmi, et.al., 2012 a, b & c). To gauge this volatility, GARCH class of models is the most appropriate model to estimate the volatility of the returns of groups of stocks with large number of observations. The analysis of ARCH and GARCH models and their many extensions catered many theories of asset pricing and portfolio analysis.

Keywords

• volatility forecasting
• garch
• gjr garch
• dhaanya