Price dynamics and market integration of natural rubber under major trade regimes of India and abroad

Abstract

Rubber is a perennial crop with an economical life span of 10-20 years. Price fluctuations have got multifaceted effect on the area, production, and productivity of the crop. Unexpected and wide fluctuations in prices may discourage farmers from taking up improved production and plant protection methods which may result in low production and instability in farm income. Cuddy Della Valle Instability Index showed that rubber prices were having considerable instability in both domestic and international markets. GARCH (1, 1) model was applied to analyse the extent of volatility in prices of natural rubber for RSS 4 grade. Results indicated that the markets experienced high level of volatility during the study period (2005–06 to 2011–12). Uniformity in prices and thereby efficiency in marketing system can be brought about by integration of the markets. Johansen’s co-integration analysis was used to test the market integration between domestic and international reference markets of rubber and the results revealed that there exists long run equilibrium.