Volatility Spillover in the Turmeric and Chili Market: Linking Futures Activity to Spot Prices

Abstract

India is the world’s largest producer and exporter of major spices such as chili and turmeric, making spice futures markets vital for price discovery and risk management. This study examines the efficiency and price discovery role of chili and turmeric futures traded on the National Commodity and Derivatives Exchange (NCDEX). Using daily spot and futures price data for chili (2010-2020) and turmeric (2010-2020), the study applies Johansen’s cointegration test, Vector Error Correction Model (VECM), Granger causality, Wald test, impulse response, variance decomposition, and GARCH (1,1) models. The results reveal a significant long-run cointegrating relationship between spot and futures prices for both commodities, indicating efficient market functioning. Error correction mechanisms operate in both markets, confirming long-run equilibrium adjustments. Short-run causality is found to flow primarily from futures to spot prices, particularly in the chili market, highlighting the price discovery role of futures trading. Volatility analysis shows that unexpected futures trading activity significantly affects spot market volatility in turmeric. Overall, spice futures markets serve as effective hedging instruments for market participants.