Market backwardation and the theory of storage: An empirical Investigation of Indian gold futures markets

Nair, Jyoti Raj, Kumar, Brajesh and Inani, Sarveshwar Kumar (2021) Market backwardation and the theory of storage: An empirical Investigation of Indian gold futures markets. Global Business Review. ISSN 09721509 (In Press)

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he backwardation and contango in the futures markets are explained by two popular theories, namely the theory of storage and the theory of risk premium. The investment assets tend to follow the theory of risk premium, whereas the consumption assets are likely to follow the theory of storage. As India is the largest importer of gold, and gold is used for consumption purposes (mostly by jewellers, who store gold as a consumption commodity), we empirically test whether backwardation in the gold market is explained by the theory of storage. We use the indirect test of the theory of storage developed by Fama and French (1988, Journal of Finance, Vol. 4, p. 1075), calculate the interest adjusted basis (IAB) and test the implications of the theory of storage. We also use two asymmetric models of the Generalized Autoregressive Conditional Heteroscedastic (GARCH) family to understand the asymmetric volatility of IAB. We find that the Indian gold futures markets partially follow the theory of storage; however, we do not find any support of asymmetric behaviour of IAB in the contango and backwardation markets. Our results suggest that in the context of the Indian gold market, keeping inventory has minimal benefits, and gold behaves more like an investment asset.

Item Type: Article
Keywords: Backwardation | Contango | Convenience Yield | Gold | Positive Asymmetry | Theory of Storage
Subjects: Social Sciences and humanities > Business, Management and Accounting > General Management
JGU School/Centre: Jindal Global Business School
Depositing User: Amees Mohammad
Date Deposited: 09 Feb 2022 06:04
Last Modified: 14 Feb 2022 06:35
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