Co-integration Dynamics amongst the Three MCX Commodity Indices : Linear and Non Linear Approaches

Purpose: The present study is an attempt to investigate the co-integration relation between daily movement of the three MCX India Commodity indices viz. MCX Agri, MCX Energy and MCX Metals for the period Oct 1, 2014 to Sep 30, 2019. Design; The methodology employed for this purpose includes ARDL and Non Linear ARDL Partial Bounds Co-integration test after incorporating single structural break. For optimal model, AIC criteria has been followed in the study . For detecting serial correlation, we have used BGLM test , ADF for stationarity while for stability CUSUM plots have been used . The linearity has been tested using Ramsey Reset test. Findings: The results of the study as given by Partial ‘F' Bounds test showed that long run co-integration under the linear ARDL was established for two of our indices MCX Energy and MCX Metals while MCX Agri had co-integration when the NARDL was employed. All the Models could satisfactorily pass all the required pre-requisites in terms of serial correlation, stationarity and stability. For structural break, Dummy was incorporated and was significant in both the linear ARDL Models. The ECM term was negative and significant in all the three models , however speed of adjustment was at a slow rate ranging between 1% - 3 % per period for all models. Research implications: These results assumes importance for policy makers as any important policy announcement for one particular commodity sector is bound to have its repercussions on other sectors in due course of time. We have already seen how agriculture prices of some crops were driven by the crude prices in early 2000 which was commonly called energy-food nexus. Hence a similar situation is likely to emerge if policy makers decide to target any one commodity sector. In fact knowledge of these inter-linkages amongst commodity indices with a slow rate of adjustment may not always be harmful to the policy makers and investors. On the contrary, this may become a good strategy in some situations e.g. by giving stimulus to agriculture, the government would be automatically passing on the benefit to other sectors with a lag thereby avoiding simultaneous stimulus to all the commodity sectors