Do efficient commodity markets co-move: evidence from Indian base metals market

The present study is an attempt to investigate in Indian context two important issues with respect to base metals (these are primarily non-ferrous metals), first to test whether the market for base metals is efficient like other financial markets and second to explore a possibility of any co-integration in prices amongst these base metals. To this end, we collect daily closing prices of five base metals, viz. aluminum, copper, zinc, lead and nickel for the study period Jan 1, 2016, to Dec 31, 2020. The methodology involves three different co-integration tests and two different ‘Day of the Week’ (market efficiency) tests. The results of the study showed that co-integration existed only when aluminium was taken as dependent variable with other metals as forcing variables. Also, no co-integration existed for other four base metals and these results were confirmed by both Engle-Granger and Gregory-Hansen tests; however, Johansen test failed to reveal any co-integration amongst any of these metals. Furthermore, test of market efficiency using ‘Day of the Week’ methodology, with Dummy OLS and GARCH(p,q) approaches, revealed that market for all the metals was efficient except copper. The study also tested model building pre-requisites of stationarity and serial correlation of variables and found these to be satisfactory. The results of the study thus revealed that copper’s prices showed market inefficiency which if exploited could provide a big opportunity for investors, traders and speculators to make profits. Market for remaining four metals was found to be efficient thus making profits difficult; however, these metals can be considered in combination with other financial assets to explore the unexplored opportunities in these markets.