Are Commodity and Stock Markets Independent of Each Other? A Case Study in India

Abstract

The temporal relationship between the commodities market and the stock market has a lot of implications for not only the participants of the markets but also for the policy makers, the producers of the commodities, and, in the case of developing nations, the economy as a whole. This relationship may be studied using various methods and by identifying the lead-lag relationship between the values of representative indices of the markets. The history of the organized commodity derivatives market in India dates back to the 19th century with the establishment of the Cotton Trade Association, where cotton futures contracts were traded in 1875, barely a decade after trading in commodity derivatives started in Chicago. In this article, the dynamics of such information transfer among the commodities spot, commodities derivatives, and stock markets in India are studied, using the information theoretic concept of entropy, which captures non-linear dynamic relationships as well.