Testing for Linear and Nonlinear Causality in Spot and Future Prices of Notional Multi-Commodity Indices

The present study investigates the linear and nonlinear causality between spot and future returns of four notional indices maintained by Multi Commodity Exchange of India (MCX). The data covers two periods June 2005 – June 2008 and July 2008 - November 2011. Apart from the conventional linear Granger test we apply a new nonparametric test for nonlinear causality by Diks and Panchenko after controlling for well-known calendar effects and long-run trends. The empirical results using both traditional and nonlinear causality tests indicate a stronger flow of information from futures to spot market in our results which confirms that future market are on the right track in playing an effective role in price discovery, thereby leading the spot market to become more efficient in the long run