Volatility Spillover using Multivariate GARCH Model: An Application in Futures and Spot Market Price of Black Pepper

Abstract

In this study, an effort has been made to identify transmission of price signals and volatility spillover effects between the spot and futures market of black pepper, using Johansen co-integration test, VEC-BEKK and Dynamic Conditional Correlation (DCC) model. The study has been conducted on the price data ranging from 1st January, 2010 to 20th May, 2013 collected from NCDEX, India. The empirical findings revealed that futures market is the main transmitter of volatility into the spot market resulting higher persistency in volatility of black pepper spot market. Analysis of volatility spillover in this context also resulted the presence of bidirectional volatility spillover between spot and futures market of black pepper. The dynamic and time varying nature of conditional correlation between spot and futures market reflecting significant volatility spillover during the period of the year 2012. The findings also suggest of one cointegrating relationship between spot and futures price in the long run.