The Impact of Futures Price Volatility to Spot Market : Case of Coffee in Indonesia
Keywords: ARCH-GARCH, commodity futures, Indonesia, price volatility, spot market
Abstract
Indonesia is the world 4th largest coffee producer after Brazil, Vietnam and Colombia with export potential and higher national consumption concluded in 2017 while the coffee production was relatively stagnant. This was led the producer to not only the production risk but also the price risk which then emphasize the importance of futures markets existence as price risk management. This study is performed to examine the impact of futures price volatility to spot market using ARCH-GARCH toward primary data of coffee futures and spot prices of 1172 trading days starting from January 2014 to June 2018. The ARCH-GARCH analysis result indicates that futures price volatility and monetary variables are impacting the volatility of spot price. Arabica spot price volatility is impacted by volatility of Arabica futures price, inflation and exchange rate while Robusta spot price is impacted by Robusta futures price volatility and exchange rate. This is confirming that futures market plays dominant role in spot price discovery. Local futures and spot prices are also found to be significantly influenced by volatility of offshore futures prices which indicates that emerging country futures market is actually influenced by offshore futures market which the price itself used as price reference.
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References
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Ajao, Y. (2012). Performance Prediction of Commodity Prices using Foreign Exchange Futures. Walden, US: Walden University.
Arnade, C and Hoffman, L. (2015). The Impact of Price Variability on Cash/Futures Market Relationships: Implications for Market Efficiency and Price Discovery. Journal of Agricultural and Applied Economics, 47 (4), 539–559.
Bollerslev, T. (1986). Generalized autoregressive conditional heteroschedasticity. Journal of Econometrics, 31, 307–327.
Bose, S. (2007). Commodity futures market in India: A study of trends in the notional multi- commodity indices. ICRA Bulletin, 3 (3) (Money & Finance), 125–158.
Chakrabarty, R and Das, R. (2010). Effect of Futures Trading on the Volatility of Spot Market in the Context of Indian Agricultural Commodity Market. GITAM Review of International Business, 3 (1), 41–61.
Dewi, A., Siregra, H. and M. A. H. (2011). Analisis Kontrak Berjangka Olein di Bursa Berjangka Jakarta. Jurnal Manajemen Dan Agribisnis, 8 (1), 1–9.
Dwyer, A., Gardner, G and William, T. (2011). Global Commodity Markets – Price Volatility and Financialisation. Report/Bulletin. Australia (AU): Reserve Bank of Australia.
Engle, R. F. (1982). Autoregressive conditional heteroschedasticity with estimates of the variance of United Kingdom inflation. Econometrica, 50 (4), 987–1008.
Fama, E. F. (1970). Efficient Capital Markets: A Review of Theory and Empirical Work. Journal of Finance, 25, 383–423.
Fortenbery, R and Zapata, H. (2004). Developed Speculation and Underdeveloped Markets – The Role of Futures Trading on Export Prices in Less Develop Countries. European Review of Agricultural Economics, 31, 451–471.
Giot, P. (2003). The information content of implied volatility in agricultural commodity markets. Journal of Futures Markets, 23 (5), 441–453.
Gupta, A and Varma, P. (2015). Impact of Futures Trading on Spot Markets: An Empirical Analysis of Rubber in India. Eastern Economic Journal, 42 (4210), 373–386.
Jackline, S and Deo, M. (2011). Lead-lag relationship between the futures and spot prices. Journal of Economics and International Finance, 3 (7), 424–427.
Joshi, V and Little, I. M. D. (1994). India: macroeconomics and political economy. Washington DC and New Delhi (US & IN): World Bank and Oxford University Press.
Kargbo, J. (2005). Impacts of Monetary and Macroeconomic Factors on Food Prices in West Africa. Agrekon, 44 (2), 205–224.
Kumar, M and Shollapur, M. (2015). Price Discovery and Volatility Spillover in the Agricultural Commodity Futures Market in India. IUP Journal of Applied Finance, 21 (1), 54–60.
Lence, S. (2009). Do futures benefit farmers? American Journal of Agricultural Economics, 91 (1), 154–167.
Maulida, R., Anggraeni, L and Pasaribu, S. H. (2018). Testing of Market Efficiency of the Cacao Commodity for the Futures Market in Jakarta Futures Exchange. Jurnal Manajemen & Agribisnis, 15 (1), 53–60.
Nicholson, W and Snyder, C. (2008). Microeconomic Theory: Basic Principles and Extension. In Ohio (US): Thomson South-Western.
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Radha, K and Balakrishnan, K. (2017). The Role of Commodity Futures in Risk Management: A Study of Select Agricultural Commodities. The IUP Journal of Financial Risk Management, 14 (14), 7–29.
Revoredo-Giha, C and Zuppiroli, M. (2013). Commodity Futures Markets: Are They an Effective Price Risk Management Tool for the European Wheat Supply Chain? Journal of Bio-Based and Applied Economics, 2 (3), 237–255.
Sarris, A., Conforti, P and Prakash, A. (2011). Using Futures and Options to Manage Price Volatility in Food Imports: Theory. In Prakash A. (ed.). Safeguarding food security in volatile global markets. In Rome (IT): Food and Agriculture Organization of the United Nations.
Sharma, D.K and Malhotra, M. (2015). Impact of Futures Trading on Volatility of spot market- A case of Guar Seed. Journal of Agricultural Finance Review, 75 (3), 416–431.
Sharma, P. (2010). Impact Analysis of Commodity Futures on Spot Prices, and Risk Management in Essential Commodities. NIAM Research Report. Rajasthan (IN): CCS National Institute of Agricultural Marketing (Ministry of Agriculture, Govt. of India).
Sharma, P. (2016). Impact Analysis of Commodity Futures on Spot Prices, and Risk Management in Essential Commodities. In NIAM Research Report. Rajasthan (IN): CCS National Institute of Agricultural Marketing, Govt. of India (IN): Ministry of Agriculture.
Srinivasan, T.N and Wallack, J. (2003). Export performance and the real effective exchange rate. in Anne O Krueger and Sajjid Z Chinoy (eds), Reforming India’s External, Financial, and Fiscal Policies. Stanford (US): Stanford University Press.
Wexler, A. (2015). Arabica Coffee Rises as Traders Worry About Brazil Rains; Coffee Was Top-Performing Commodity in 2014. Wall Street Journal (Online). New York [7 January 2015].
Wibowo, B. (2017). Hedging Ratio Measurement Methods and Hedging Effectiveness in Jakarta Futures Exchanges. Jurnal Ekonomi Pembangunan, 18 (1), 118–130.
[BAPPEBTI] Badan Pengawas Perdagangan Berjangka Komoditi. (2015). Analisis Harga Kopi Robusta 2015. Jakarta, Indonesia: Bappebti.
[BAPPEBTI] Badan Pengawas Perdagangan Berjangka Komoditi (2017). Jakarta, Indonesia: Bappebti.
[DIRJENBUN] Direktorat Jenderal Perkebunan. (2017). Statistik Perkebunan Indonesia: Kopi. Jakarta, Indonesia: DIRJENBUN.
[ICO] International Coffee Organization. (2017). Coffee Market Report July 2017. Retrieved from https://www.indonesia-investments.com/id/bisnis/komoditas/kopi/item186.
[UNCTAD] United Nation Conference of Trade and Development. (2009). Trade and development report 2009. Geneva.
Ajao, Y. (2012). Performance Prediction of Commodity Prices using Foreign Exchange Futures. Walden, US: Walden University.
Arnade, C and Hoffman, L. (2015). The Impact of Price Variability on Cash/Futures Market Relationships: Implications for Market Efficiency and Price Discovery. Journal of Agricultural and Applied Economics, 47 (4), 539–559.
Bollerslev, T. (1986). Generalized autoregressive conditional heteroschedasticity. Journal of Econometrics, 31, 307–327.
Bose, S. (2007). Commodity futures market in India: A study of trends in the notional multi- commodity indices. ICRA Bulletin, 3 (3) (Money & Finance), 125–158.
Chakrabarty, R and Das, R. (2010). Effect of Futures Trading on the Volatility of Spot Market in the Context of Indian Agricultural Commodity Market. GITAM Review of International Business, 3 (1), 41–61.
Dewi, A., Siregra, H. and M. A. H. (2011). Analisis Kontrak Berjangka Olein di Bursa Berjangka Jakarta. Jurnal Manajemen Dan Agribisnis, 8 (1), 1–9.
Dwyer, A., Gardner, G and William, T. (2011). Global Commodity Markets – Price Volatility and Financialisation. Report/Bulletin. Australia (AU): Reserve Bank of Australia.
Engle, R. F. (1982). Autoregressive conditional heteroschedasticity with estimates of the variance of United Kingdom inflation. Econometrica, 50 (4), 987–1008.
Fama, E. F. (1970). Efficient Capital Markets: A Review of Theory and Empirical Work. Journal of Finance, 25, 383–423.
Fortenbery, R and Zapata, H. (2004). Developed Speculation and Underdeveloped Markets – The Role of Futures Trading on Export Prices in Less Develop Countries. European Review of Agricultural Economics, 31, 451–471.
Giot, P. (2003). The information content of implied volatility in agricultural commodity markets. Journal of Futures Markets, 23 (5), 441–453.
Gupta, A and Varma, P. (2015). Impact of Futures Trading on Spot Markets: An Empirical Analysis of Rubber in India. Eastern Economic Journal, 42 (4210), 373–386.
Jackline, S and Deo, M. (2011). Lead-lag relationship between the futures and spot prices. Journal of Economics and International Finance, 3 (7), 424–427.
Joshi, V and Little, I. M. D. (1994). India: macroeconomics and political economy. Washington DC and New Delhi (US & IN): World Bank and Oxford University Press.
Kargbo, J. (2005). Impacts of Monetary and Macroeconomic Factors on Food Prices in West Africa. Agrekon, 44 (2), 205–224.
Kumar, M and Shollapur, M. (2015). Price Discovery and Volatility Spillover in the Agricultural Commodity Futures Market in India. IUP Journal of Applied Finance, 21 (1), 54–60.
Lence, S. (2009). Do futures benefit farmers? American Journal of Agricultural Economics, 91 (1), 154–167.
Maulida, R., Anggraeni, L and Pasaribu, S. H. (2018). Testing of Market Efficiency of the Cacao Commodity for the Futures Market in Jakarta Futures Exchange. Jurnal Manajemen & Agribisnis, 15 (1), 53–60.
Nicholson, W and Snyder, C. (2008). Microeconomic Theory: Basic Principles and Extension. In Ohio (US): Thomson South-Western.
Pertiwi, D. (2016). Pengujian Efisiensi Pasar dan Tingkat Konvergensi Harga Komoditas Kopi Arabika dan Kopi Robusta (Studi Kasus pada Pasar Komoditas Berjangka di Indonesia). Jurnal Manajemen Pemasaran, 9 (2), 43–53.
Putri, M.A., Fariyanti, A and Kusnadi, N. (2013). Struktur dan Integrasi Pasar Kopi Arabika Gayo di Kabupaten Aceh Tengah dan Bener Meriah. Buletin RISTI., 4 (1), 47–54.
Radha, K and Balakrishnan, K. (2017). The Role of Commodity Futures in Risk Management: A Study of Select Agricultural Commodities. The IUP Journal of Financial Risk Management, 14 (14), 7–29.
Revoredo-Giha, C and Zuppiroli, M. (2013). Commodity Futures Markets: Are They an Effective Price Risk Management Tool for the European Wheat Supply Chain? Journal of Bio-Based and Applied Economics, 2 (3), 237–255.
Sarris, A., Conforti, P and Prakash, A. (2011). Using Futures and Options to Manage Price Volatility in Food Imports: Theory. In Prakash A. (ed.). Safeguarding food security in volatile global markets. In Rome (IT): Food and Agriculture Organization of the United Nations.
Sharma, D.K and Malhotra, M. (2015). Impact of Futures Trading on Volatility of spot market- A case of Guar Seed. Journal of Agricultural Finance Review, 75 (3), 416–431.
Sharma, P. (2010). Impact Analysis of Commodity Futures on Spot Prices, and Risk Management in Essential Commodities. NIAM Research Report. Rajasthan (IN): CCS National Institute of Agricultural Marketing (Ministry of Agriculture, Govt. of India).
Sharma, P. (2016). Impact Analysis of Commodity Futures on Spot Prices, and Risk Management in Essential Commodities. In NIAM Research Report. Rajasthan (IN): CCS National Institute of Agricultural Marketing, Govt. of India (IN): Ministry of Agriculture.
Srinivasan, T.N and Wallack, J. (2003). Export performance and the real effective exchange rate. in Anne O Krueger and Sajjid Z Chinoy (eds), Reforming India’s External, Financial, and Fiscal Policies. Stanford (US): Stanford University Press.
Wexler, A. (2015). Arabica Coffee Rises as Traders Worry About Brazil Rains; Coffee Was Top-Performing Commodity in 2014. Wall Street Journal (Online). New York [7 January 2015].
Wibowo, B. (2017). Hedging Ratio Measurement Methods and Hedging Effectiveness in Jakarta Futures Exchanges. Jurnal Ekonomi Pembangunan, 18 (1), 118–130.
Published
Mar 1, 2019
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How to Cite
Anis Erma Wulandari, Harianto Harianto, Bustanul Arifin, & Heny K Suwarsinah. (2019). The Impact of Futures Price Volatility to Spot Market : Case of Coffee in Indonesia. Jurnal Organisasi Dan Manajemen, 15(1), 1–15. https://doi.org/10.33830/jom.v15i1.5.2019
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