Study of Causality Between Intercontinental Exchange (ICE) and Indian Cotton Futures Prices

Abstract

Cotton is the major fibre crop which is traded globally.  India is one of the major producer, consumer and exporter of cotton whereas US is one of the major producer and exporter of Cotton. Cotton 2.0 Futures in Intercontinental Exchange (ICE) has been the benchmark price for cotton across the world alongside Cotlook A index. In India, Multi Commodity Exchange (MCX) cotton futures provides a platform for price discovery and price risk management for agriculturists, traders and processors. This study is carried on to identify the causality of price movements between ICE cotton futures and MCX cotton futures. It is identified that there exists a bidirectional causal relationship between Intercontinental Exchange and Multi-Commodity Exchange of India (MCX) cotton futures prices. Johansen Co-integration analysis and Vector Error Correction Model indicates the existence of long run and short run equilibrium relationship between ICE and MCX cotton futures price series. The study is helpful in establishing that ICE futures prices are also to be considered when making any price estimates by the spinning and other cotton related industry when making purchase and stocking decisions related to cotton.