Hedging versus Speculation in Emerging Commodity Markets: Evidence from China and India

Abstract

This research is an in-depth study of financial speculation in the commodity futures markets of China and India that provides a comparative analysis of speculative behaviour in the commodity futures of these two economies. The analysis targets two agricultural commodities and two metal commodities from each country, which allows for a balance between comparisons of market behaviour for different types of products. Based on over 20 years of historical data, the research uses quantitative methods to calculate hedging and speculation ratios and gives insights into the intensity of speculative trading in both markets. Data processing and visual outputs were generated using STATA to aid in the interpretation of the results. The results show that India's commodity futures markets are characteristically fraught with speculative activity as compared to China, and this trend is consistent with both agricultural and metal commodity categories. This means that Indian traders are more speculative in their positions, whereas Chinese markets exhibit relatively greater hedging and risk management tendencies. The research has significant implications for policymakers, market regulators, and participants of commodity markets in order to gain an understanding of speculative dynamics in key emerging economies. By underlining the behavioral patterns of investors in China and India, the research adds to a better understanding of market efficiency, risk exposure, and trading motivations. The increased knowledge can guide the formulation of more effective regulatory instruments and strategic interventions adapted to the special features of the commodities futures market in each country.