Financialization – Evidence from Dynamic Connectedness among Agricultural Index Futures

Abstract

The introduction of index futures was a landmark event for glob­al commodity markets. It has been blamed by regulators and academicians for its role in food price surges from time to time. This paper examines the price discovery and volatility spillover relationship among agricultural in­dex futures globally. Results from the study reveal that index futures play a dominant role in contributing to price discovery. The price leadership of the futures market, although found to be strong, is diminished in the presence of stringent regulatory trading curbs that were put in place as a response to the crisis. Furthermore, an improved Diebold & Yilmaz method based on TVP-VAR-SV model was used to analyze dynamic connectedness between the index and standalone contracts of agriculture commodity markets. The results show that the impacts on the net spillover of various indices are different. Howev­er, the evidence fails to support the argument that volatility is induced due to spillovers among the indices.