A PROJECT REPORT

ON
IMPACT OF CRUDE OIL ON CNX

Submitted in partial fulfillment of the requirements

for the award of the degree of
Master of Business Administration (MBA)
To

Guru Gobind Singh Indraprastha University, Delhi

Under the Guidance of:

Submitted By:

MS. HARITIKA CHHATWAL

MAMTA
Enrollment No. 01212303912

DELHI INSTITUTE OF ADVANCED STUDIES

Batch 2012-2014

ACKNOWLEDGEMENT

I would like to express my gratitude to all those who gave me the responsibility to complete
this report. I want to thank Dr I.B. SINGH, Director General, DIAS, for giving me the
permission to commence this report. I am deeply indebted to my guide Ms. HARITIKA
CHHATWAL from the department of MBA whose help, stimulating suggestions &
encouragement helped me all the time of research for and writing of this project Report.
I have furthermore to thank my friends without their help it would not have been possible for
me to complete this project report. Especially, I would like to give my special thanks to my
family members whose patient love enabled me to complete this work.

MAMTA
MBA 4th Semester

DECLARATION

I, MAMTA, Enrollment No. 01212303912, MBA 4th semester, hereby declare that the project
report titled IMPACT OF CRUDE OIL ON CNX is an original work done by me under the
guidance of Ms. Haritika Chhatwal and has not been submitted to any other university or
institute for the award of any degree or diploma or fellowship.

Date :

MAMTA
Enroll No. 01212303912

Executive Summary
This project IMPACT OF CRUDE OIL ON CNX explore about the direction and degree of
relationship between crude oil prices and CNX. The main aim of this project is to find out the
relationship between crude oil prices and CNX and if so then to arrive at meaningful conclusions
based on relationship between them.
The value of Crude Oil of Multi Commodity Exchange of India Limited one among premier
commodity markets in India and the values of major indices CNX of Indian stock markets for the
particular period had been taken as samples for this study.
The major finding of this project is that there exists meaningful relationship between CRUDE OIL
prices and CNX nifty . And that relationship is of positive in nature; that is crude oil prices follows
the route of Indian Stock Market.

INDEX
S. No.

Topic

Page no.

Acknowledgements

Declaration

Executive Summary

Chapter-1: Introduction
6-15

Chapter -2: Literature Review

16-20

Chapter -3: Research Methodology

21-28

Chapter -4: Data Interpretation

29 -35

Chapter -5: Limitations

36-37

Chapter -6: Conclusion

38-39

10

Bibliography

40

CHAPTER-1
INTRODUCTION

INTRODUCTION
Crude Oil

Crude oil is the term that is used for the raw oil that is taken directly from the ground. It is the oil
that is unprocessed for use. Another common name for crude oil is petroleum. Crude oil is a
fossil fuel that is made from decaying plant matter that has been under pressure in the earths
crust for many years. It is most often mined from sea beds and places that once held sea water. It
ranges in color from clear to tar-black and can be thin like water or much thicker to the point
where it is almost solid. Some of the more common used of crude oil in the world today!
Uses of Crude Oil

The main use of crude oil is to make it into other products. There are many products that
are derived from crude oil.

Crude oil is used to make a variety of fuels including gasoline, diesel fuel, jet fuel,
bunker fuel and kerosene. This fuels power all the automotive vehicles and engine powered
machinery on the planet.

Crude oil is also used to make fertilizers and pesticides. Nearly all of these products are
made from crude oil.

Crude oil is used to make other products such as plastics and waxes. These are used in the
packaging of frozen foods and other items.

It is also used to make tar, sulfuric acid, asphalt, petroleum coke (solid fuel) and paraffin

wax.

Crude oil is also a main ingredient in the production of synthetic rubbers.

Crude oil is used in the production of cosmetics and perfumes.

Crude oil is also used to produce a number of industrial solvents that are used to clean
machinery.

It is also used in liquid fuels such as butane and propane which are used in home grills.

Top 10 Biggest Oil Consumption Countries

Crude oil had been the hottest commodity traded in the market beside gold. The industries
around the world had been powered up by "black gold" which is another name for crude oil. Cars
and machines would not be able to run without power and crude oil is one of the hottest power
sources. Countries war against one another for oil. In 1995, United Nations introduced Oil-forFood Programme for Iraq to exchange oil for food, medicine and other basic human needs.
Below is the list of top 10 oil consumer countries in the world.
Rank

Country

Oil - consumption (bbl/day)

1 United
States

19,150,000

2 China

9,400,000

3 Japan

4,452,000

4 India

3,182,000

5 Saudi Arabia

2,643,000

6 Germany

2,495,000

7 Canada

2,209,000

8 Russia

2,199,000

9 Korea,
South

2,195,000

10 Mexico

2,073,000

This entry is the total oil consumed in barrels per day (bbl/day). The discrepancy between the
amount of oil produced and/or imported and the amount consumed and/or exported is due to the
omission of stock changes, refinery gains, and other complicating factors.

Top 10 oil consumption countries

Russia; 4% Korea, South; 4%

Canada; 4%
Germany; 4%
Country; 38%
Saudi Arabia; 5%
India; 5%
Japan; 6%
China; 9%
United States; 19%

Financial services
Financial services are the economic services provided by the finance industry, which
encompasses a broad range of organizations that manage money, including credit unions, banks,
credit card companies, insurance companies, consumer finance companies, stock brokerages,
investment funds and some government sponsored enterprises.

History of Indian Stock Market

The Indian broking industry is one of the oldest trading industries that have been around
even before the establishment of BSE in 1875. BSE is the oldest stock market in India.The
history of India stock trading starts with 318 persons taking membership in Native share and
Stock Brokers Association, which we know by the name Bombay Stock Exchange or BSE in
short. In 1965, BSE got permanent recognition from the Government of India. BSE and NSE

10

represent themselves as synonyms of India stock market. The history of India stock market is
almost the same as the history of BSE

Bombay Stock Exchange (BSE)

Bombay Stock Exchange is the oldest stock exchange in Asia with a rich heritage, now spanning
three centuries in its 133 years of existence. What is now popularly known as BSE was
established as "The Native Share & Stock Brokers' Association" in 1875. BSE is the first stock
exchange in the country which obtained permanent recognition (in 1956) from the Government
of India under the Securities Contracts (Regulation) Act 1956. BSE's pivotal and pre-eminent
role in the development of the Indian capital market is widely recognized. It migrated from the
open outcry system to an online screen-based order driven trading system in 1995. Earlier an
Association of Persons (AOP), BSE is now a corporatized and demutualised entity incorporated
under the provisions of the Companies Act, 1956, pursuant to the BSE (Corporatization and
Demutualization) Scheme, 2005 notified by the Securities and Exchange Board of India (SEBI).
With demutualization, BSE has two of world's best exchanges, Deutsche Brse and Singapore
Exchange, as its strategic partners.
Over the past 133 years, BSE has facilitated the growth of the Indian corporate sector by
providing it with an efficient access to resources. There is perhaps no major corporate in India
which has not sourced BSE's services in raising resources from the capital market. Today, BSE is
the world's number 1 exchange in terms of the number of listed companies and the world's 5th in
transaction numbers. The market capitalization as on December 31, 2007 stood at USD 1.79
trillion. An investor can choose from more than 4,700 listed companies, which for easy
reference, are classified into A, B, S, T and Z groups.
The BSE Index, SENSEX, is India's first stock market index that enjoys an iconic stature, and is
tracked worldwide. It is an index of 30 stocks representing 12 major sectors. The SENSEX is
constructed on a 'free-float' methodology, and is sensitive to market sentiments and market
realities. Apart from the SENSEX, BSE offers 21 indices, including 12 sect oral indices.
BSE has entered into an index cooperation agreement with Deutsche Brse. This agreement has
made SENSEX and other BSE indices available to investors in Europe and America. Moreover,
11

Barclays Global Investors (BGI), the global leader in ETFs through its iShares brand, has
created the 'iShares BSE SENSEX India Tracker' which tracks the SENSEX.
The ETF enables investors in Hong Kong to take an exposure to the Indian equity market. The
first Exchange Traded Fund (ETF) on SENSEX, called "SPICE" is listed on BSE. It brings to the
investors a trading tool that can be easily used for the purposes of investment, trading, hedging
and arbitrage. SPICE allows small investors to take a long-term view of the market.
BSE provides an efficient and transparent market for trading in equity, debt instruments and
derivatives. It has a nation-wide reach with a presence in more than 359 cities and towns of
India. BSE has always been at par with the international standards. The systems and processes
are designed to safeguard market integrity and enhance transparency in operations.
BSE is the first exchange in India and the second in the world to obtain an ISO 9001:2000
certification. It is also the first exchange in the country and second in the world to receive
Information Security Management System Standard BS 7799-2-2002 certification for its BSE
On-line Trading System (BOLT). BSE continues to innovate. In recent times, it has become the
first national level stock exchange to launch its website in Gujarati and Hindi to reach out to a
larger number of investors. It has successfully launched a reporting platform for corporate bonds
in India christened the ICDM or Indian Corporate Debt Market and a unique ticker-cum-screen
aptly named 'BSE Broadcast' which enables information dissemination to the common man on
the street. In 2006, BSE launched the Directors Database and ICERS (Indian Corporate
Electronic Reporting System) to facilitate information flow and increase transparency in the
Indian capital market.
While the Directors Database provides a single-point access to information on the boards of
directors of listed companies, the ICERS facilitates the corporate in sharing with BSE their
corporate announcements. BSE also has a wide range of services to empower investors and
facilitate smooth transactions: Investor Services: The Department of Investor Services redresses
grievances of investors.
BSE was the first exchange in the country to provide an amount of Rs.1 million towards the
investor protection fund; it is an amount higher than that of any exchange in the country. BSE
12

launched a nationwide investor awareness programme- 'Safe Investing in the Stock Market'
under which 264 programmes were held in more than 200 cities. The BSE On-line Trading
(BOLT): BSE On-line Trading (BOLT) facilitates on-line screen based trading in securities.
BOLT is currently operating in 25,000 Trader Workstations located across over 359 cities in
India. BSEWEBX.com: In February 2001, BSE introduced the world's first centralized
exchange-based Internet trading system, BSEWEBX.com. This initiative enables investors
anywhere in the world to trade on the BSE platform.
Surveillance: BSE's On-Line Surveillance System (BOSS) monitors on a real-time basis the
price movements, volume positions and members' positions and real-time measurement of
default risk, market reconstruction and generation of cross market alerts. BSE Training
Institute: BTI imparts capital market training and certification, in collaboration with reputed
management institutes and universities.
It offers over 40 courses on various aspects of the capital market and financial sector. More than
20,000 people have attended the BTI programmes Awards The World Council of Corporate
Governance has awarded the Golden Peacock Global CSR Award for BSE's initiatives in
Corporate Social Responsibility (CSR). The Annual Reports and Accounts of BSE for the year
ended March 31, 2006 and March 31 2007 have been awarded the ICAI awards for excellence in
financial reporting. The Human Resource Management at BSE has won the Asia - Pacific HRM
awards for its efforts in employer branding through talent management at work, health
management at work and excellence in HR through technology Drawing from its rich past and its
equally robust performance in the recent times, BSE will continue to remain an icon in the Indian
capital.

National Stock Exchange (NSE)

The National Stock Exchange of India is a stock Exchange that is located in Mumbai,
Maharashtra. The National Stock Exchange basically function in three market sections, that is,
(CM) the Capital Market Section); F&Q (The Future and Options Market Sections) and WDM
(Wholesale Debt Market Segment). It is important place where the trading of shares, debt etc
takes place.
13

It was in year 1992 that the National stock Exchange was for the first time incorporated in India.
It was not regarded as a stock exchange at once. Rather, the national Stock exchange was
incorporated as a tax paying company and had got the recognition of a stock exchange only in
year 1993 the recognition was given under the provisions of the Securities Contracts
(Regulation) Act, 1956.
The National Stock exchange is highly active in the field of market capitalization and thus
aiming it the ninth largest stock exchange in the said field. Similarly, the trading of the stock
exchange in equities and derivatives is so high that it has resulted in high turnovers and thus
making it the largest stock exchange in India.
It is the stock exchange wherein there is the facility of electronic exchange offering investors.
This facility is available in almost types of equitable transactions such as equities, debentures,
etc. it is also the largest stock exchange if calculated in the terms of traded values.

Origin and History of the National Stock Exchange

The National Stock exchange was incorporated for the first time in November, 1992. The
national stock exchange was not incorporated as the national stock exchange; rather, it had got
the recognition of the recognized stock exchange in April, 1993. The National stock Exchange
has increased its trading facilities in June 1994 when the WDM (Wholesale Debt Market
Segment) was gone live. It is basically one of the three market segments in which the national
stock Exchange works. In the same year, 1994 November, the Capital Market (CM) segment of
the stock exchange goes live through VSAT.
The National Stock Exchange has become the first Clearing Corporation in India by the
introduction of NSCCL in April 1995. In the same year, 1995 July, it has introduced the Investor
protection fund which is a very important function introduced by the national Stock Exchange.

14

The National stock Exchange had grown with leaps and bounds and had shown tremendous
growth mainly in all the fields and thus making it the largest stock exchange of India by October,
1995.
The concept of NSCCL was extended by the introduction of clearing and settlement with the
help of NSCCL in year 1996. The National stock Exchange has introduced its Index for the first
time in year April 1996. The index was known as the S&P CNX Nifty Index. In year June 1996,
it has introduced the Settlement Guarantee Fund. The National Securities Depositor Fund was
launched by the National Stock exchange in year 1996, November, and thus making it the first
stock exchange who becomes the first depository in India.
Because of the efforts and introduction of new concept in the field of trading, the National stock
Exchange has received the BEST IT USAGE award by the computer Society of India in the year
November, 1996. It has also received an award for the TOP IT USER in the name of Dataquest
award in year December, 1996.
The National stock exchange has also introduced another index in year December 1996 in the
name of CNX Nifty Junior in year 1996. It had again received an award for the BEST IT
USAGE award by the computer Society of India in the year December, 1996. In May, 1998 it
had launched its first website. Further in October 1999, it had launched the NSE.IT LTD. Further
in year October, 2002, it had launched the Government securities index.
The growth of the National Stock Exchange has been tremendous in every field. It had
introduced several programmes and has achieved various achievements and awards while
working best in the field in which it is working. The efforts and hard work that is contributed by
the National Stock exchange has been tremendous and thus making an important and unique
stock exchange in India.

15

16

CHAPTER -2
LITERATURE
REVIEW

LITERATURE REVIEW

Manish Kumar (February 2014), The Impact of Oil Price Shocks on Indian Stock and
Foreign Exchange Markets. The purpose of this study is to examine the impact of oil prices
on the stock market and exchange rates using the daily data for India. They use the unit root and
co- integration tests while taking into account the possible structural breaks among the variables,
and the results show that stock prices, exchange rates and oil prices are not co- integrated. The
results of the long-run elasticity of the stock price function suggest that oil prices and exchange
rates have a positive and statistically significant effect on the Indian stock market.
17

Prof. Vishal Sood ,Dr. Ira Bapna, Dr. N. K. Totala and Prof. H.S. Saluja (January 2014), Crude
Oil and Indian Capital Market: An Empirical Analysis. This paper is an attempt to measure
crude oil price uncertainty caused by endogenous conditional factors and variables as S&P CNX
Nifty and S&P CNX Nifty companies' futures. The measure of volatility will be done on the
basis of daily returns of S&P CNX Nifty and S&P CNX Nifty companies' futures and crude oil.
Conditional standard deviations will be derived from uni-variate GARCH models.
TarakNathSahu, KalpataruBandopadhyay, DebasishMondal, (2014) "An empirical study on the
dynamic relationship between oil prices and Indian stock market",In this study, Johansen's
cointegration test, vector error correction model (VECM), Granger causality test, impulse
response functions (IRFs) and variance decompositions (VDCs) test have been applied to exhibit
the long-run and short-run relationship between them. The cointegration result indicates the
existence of long-term relationship. Further, the error correction term of VECM shows a longrun causality moves from Indian stock market to oil price but not the vice versa. The results of
the Granger causality test under the VECM framework confirm that no short-run causality
between the variables exists. The VDCs analysis revealed that the Indian stock markets and
crude oil prices are strongly exogenous. Finally, from the IRFs, analysis revealed that a positive
shock in oil price has a small but persistence and growing positive impact on Indian stock
markets in short run.
Dr. AmalenduBhunia (2013), Co integration And Causal Relationship Among Crude Price,
Domestic Gold Price And Financial Variables an Evidence Of BSE And NSE. The present
study investigates the co integration relationships among crude oil price, domestic gold price and
selected financial variables (exchange rates and stock price indices) in India. In the course of
analysis, ADF unit root test, Johansen co integration analysis and Granger causality test have
been designed. Johansen co integration test result indicates that there exists a long-term
relationship among the selected variables. Granger causality test result shows that there must be
either bidirectional or no causality among the variables.
Himanshu Jain and Prof. Surendra Singh (2013), Macro-Economic Impact of Crude Oil
Prices on Economy. This paper employs correlation matrix and regression model to articulate
the relationship between the different macro-economic components of Indian economy. In an
empirical dataset covering twenty years, we detect that these variables are highly sensitive to the
fluctuation of crude oil prices.The objective of this paper is to assess the impact of crude oil price
fluctuations on economy through the different macro-economic indicators.

Dilip Kumar, S. Maheswaran, (2013) "Correlation transmission between crude oil and
Indian markets", In this paper, the authors aim to investigate the return, volatility and
correlation spillover effects between the crude oil market and the various Indian industrial
sectors (automobile, financial, service, energy, metal and mining, and commodities sectors) in
18

order to investigate optimal portfolio construction and to estimate risk minimizing hedge ratios.
This paper has empirical originality in investigating the return, volatility and correlation spillover
effects from the crude oil market to the various Indian industrial sectors using BVGARCH
models with the error terms assumed to follow the Student's t distribution.

KirtiKhanna andNidhi Sharma (2012), 'Crude Oil Price Velocity & Stock Market Ripple' - A
Comparative Study of BSE with NYSE & LSE. This paper has analyzed the performance or
the reaction of the stock market towards the crude oil price change. For this purpose, this study
has considered mainly three stock markets; New York Stock Exchange (NYSE), Bombay Stock
Exchange (BSE) and London Stock Exchange (LSE); belongs to USA, India and UK
respectively. In this study the researcher has established the relationship between those stock
markets with their crude oil benchmarks, West Texas Intermediate (NYMX), MCX crude oil
(Multi commodity exchange of India) and UK Brent Blend. The study further has a discussion
about the relationship of OPEC benchmark and selected stock market with oil benchmarks. The
study is based on the daily % changes in oil prices and % changes in daily market returns as per
the stock market indices from 2008-09 to 2010-11.the result of study shows that there was the
significant impact of crude oil changes on stock market returns up to the some extent.
Hamed Sadri and EhsanTayebiSani (2012), The Impact of Crude Oil, gold price & Their
Volatilities on Stock Markets:Evidence from Selected Member of OPEC. In this paper they
examine the volatility of crude oil and gold price with GARCH model by using statistics of
selected members of OPEC and global crude oil gold prices and then we survey the relation
between the crude oil, gold prices and theirvolatilizes with stock markets by panel data model.
The results suggest that (1) crude oil prices have a significant positive effect on stock exchange
index of studied countries meanwhile this effect is negative for gold price.(2) The volatility of
crude oil prices has scant positive effect on stock markets of selected country meanwhile the
positive effect of gold is more noticeable.

KrishnareddyChittedi (2011), Does Oil Price Matters For Indian Stock Markets?This paper
investigates the long run relationship between oil prices and stock pricesfor India over the period
April 2000- June 2011. We employ Auto RegressiveDistributed Lag (ARDL) Model that takes
into consideration the long runrelationship. The results obtained suggest that volatility of stock
prices in Indiahave a significant impact on the volatility of oil prices. But a change in the oil
pricesdoes not have impact on stock prices.
Emmanuel Anoruo (2011) , Testing for Linear and Nonlinear Causality between Crude Oil
Price Changes and Stock Market Returns.This study applied a battery of unit root tests to
ascertain the time series properties of crude oil price changes and stock market returns. The
linear and nonlinear causality tests were conducted through the standard VAR and the M-G
19

frameworks, respectively. The results from both the linear and nonlinear unit root tests indicate
that crude oil price changes and stock market returns are level stationary. The results from the
standard VAR model provide evidence of bidirectional causality between crude oil price changes
and stock market returns. The results from the M-G causality test sup- port the finding of
nonlinear bidirectional causality between crude oil price changes and stock market returns.
Hosseini, Seyed Mehdi; Ahmad, Zamri; Yew WahLai(2011) , The Role of Macroeconomic
Variables on Stock Market Index in China and India. This paper investigates the
relationships between stock market indices and four macroeconomics variables, namely crude oil
price (COP), money supply (M2), industrial production (IP) and inflation rate (IR) in China and
India. The period covers in this study is between January 1999 to January 2009. Using the
Augmented Dickey-Fuller unit root test, the underlying series are tested as non-stationary at the
level but stationary in first difference. The use of Johansen-Juselius (1990) Multivariate
Cointegration and Vector Error Correction Model technique, indicate that there are both long and
short run linkages between macroeconomic variable and stock market index in each of these two
countries.
K. S. Sujit and B. Rajesh Kumar (2011), Study On Dynamic Relationship Among Gold Price,
Oil Price, Exchange Rate And Stock Market Returns. This study is an attempt to test the
dynamic relationship among gold price, stock returns, exchange rate and oil price. All these
variables have witnessed significant changes over time and hence, it is absolutely necessary to
validate the relationship periodically. This study takes daily data from 2nd January 1998 to 5th
June 2011, constituting 3485 observations. Using techniques of time series the study tried to
capture dynamic and stable relationship among these variables using vector autoregressive and
cointegration technique. The results show that exchange rate is highly affected by changes in
other variables. However, stock market has fewer roles in affecting the exchange rate. In this
study we tested two models and one model suggests that there is weak long term relationship
among variables.
Samuel Imarhiagbe (2010),Impact Of Oil Prices On Stock Markets: Empirical Evidence
From Selected Major Oil Producing And Consuming Countries. This paper analyzes the
impact of oil prices on stock prices of selected major oil producing and consuming countries
with nominal exchange rate as additional determinant. In all countries, variance decomposition
and impulse response tests confirm existence of oil prices and exchange rates influences over
stock prices.
Syed A. Basher and Perry Sadorsky (2006), Oil price risk and emerging stock markets.The
purpose of this paper is to contribute to the literature on stock markets and energy prices by
studying the impact of oil price changes on a large set of emerging stock market returns. The
approach taken in this paper uses an international multi-factor model that allows for both
20

unconditional and conditional risk factors to investigate the relationship between oil price risk
and emerging stock market returns.

CHAPTER -3
21

RESEARCH
METHODOLOGY

OBJECTIVE OF THE STUDY

The specific objectives of this present study are as follows:
1. To examine the long term relationship between crude oil prices and CNX nifty.
2. To examine the volatility of CNX nifty due to change in crude oil prices.

DATA COLLECTION
Secondary data has been used for the analysis. The data consist of time series of daily spot prices
of crude oil from Multi Commodity Exchange's (MCX). The MCX market provides important
price information to buyers and sellers of crude oil in India. The daily closing data is taken from
1st January 2009 to 31st march 2014 for the analysis. Data of spot oil price are obtained from the
MCXs official website. NIFTY of Indian stock markets are of Secondary in nature; not primarily
necessary. The reason for selecting the above commodity is the major contributor to the day to day
trading at the commodity exchanges. These data are available for public use and these data can be
accessed by anybody at anytime.
22

Methods And Techniques

In this study, we would be using ADF Test. The first step is to check whether there exists a longterm relationship between the two variables or not which can be done using the Johansen Cointegration Test. Finally,Garch (1, 1) Model has been used to test for the volatility in the spot
price series of oil commodity in India. These entire tests have been carried on the E-views
software.
Testing For Stationarity of Price Series
Most of the financial series are non-stationary in the level form. The prior step to carry out any
analysis in time-series is to test for stationarity. An examination of whether a series is stationary
or not is essential for two reasons:
a) A stationary or otherwise of a series strongly influences its behavior and properties. For
stationary series, shock or the error term dies away gradually while for a non-stationary
series, the persistence of a shock will always be infinite.
b) The use of non-stationary data can lead to spurious regressions. It means that when the
standard regression techniques are applied to non-stationary data, the end results could
show a high R2 and significant coefficient estimates but is valueless.
A stationary series can be defined as one with a constant mean, constant variance and constant
covariance for each given lag (Brooks, 2008) and thus conventional statistical results are
appropriate while a non-stationary series has time varying mean and variance. Testing for
stationarity implies testing for the presence of unit roots. A non-stationary series, y t must be
differenced d times before it becomes stationary, then the series is said to be integrated of order
d, i.e., if yt ~ I(d), then dyt ~ I(0) implies that applying the difference operator , , d times, leads
to an I(0) process, i.e., presence of no unit roots. An I(0) is a stationary process while an I(1) is a
non-stationary process with one unit root. Consider an AR(1) processY t =Y t 1+ t
Where, t is the error term that follows a white-noise process.
H0:

= 1 indicates the presence of unit root and thus the non-stationarity of the series.

H1:

< 1 indicates absence of unit roots and thus stationarity of the series.

23

Taking first difference of the above series i.e.,

Y t Y t1=(1)Y t 1+ t
Y t = Y t1 + t

Or,

[ = -1]

Here, = 1 is equivalent to a test of = 0 so that not rejecting = 0 implies presence of

unit root and of < 1 implies stationarity of the series.
Augmented Dickey Fuller Test
Dickey and Fuller were the first to test for a unit root in a time-series analysis. The Augmented
Dickey Fuller test uses the following regressionk

yt = a + yt-1 +

i=1

yt-i + t ..(1)

yt = a + t +yt-1 +

b
i=1

yt-i + t ........(2)

The regression test for unit root in y t, where yt-i is the lagged difference to accommodate serial
correlation in the errors, t. k is the appropriate lag length.
The null and alternate hypotheses of the regression are
H0 : = 0
H1 : < 0
Not rejecting the null hypothesis indicates the presence of a unit root i.e., the series is nonstationary while rejecting the null implies a mean stationary process in case of equation (1) and a
trend stationary process in case of equation (2). If Y t is stationary, it is called a differenced
stationary process. If Yt is stationary while Yt is not, then Yt is called integrated of first order
I(1).Presence of a unit root implies a permanent effect of random shocks and variance is timedependent i.e., increases with time.The test statistics for the original Dickey Fuller test are
defined as

Test statistics =

^
s . e ^

24

The test statistics do not follow the usual t-distribution under the null hypothesis, since the null
hypothesis is that of non-stationarity, but rather it follows a non- standard distribution. This test
statistic is then compared to the value of Dickey Fuller test. If this test statistic is less than the
critical value, then the null hypothesis is rejected confirming the absence of unit root and thus
stationarity of the series. However, if this test statistic is greater than the critical value, presence
of unit root and thus non-stationarity is confirmed.

Johansens Co-integration Test

A set of variables is said to be co-integrated, if a linear combination of them is stationary. Spot
and futures prices are expected to be co-integrated as they are the prices of the same asset in
different points in time and hence will be affected by given any information. A co-integrating
relationship may also be seen as a long-term or equilibrium phenomenon, since it is possible that
co-integrating variables may deviate from their relationship in short run, but it will return in the
long run. The aim of this test is to determine whether a long-term relationship exists between the
variables or not. Johansens methodology takes its starting point in the vector auto regression
(VAR) of order p given by
y t =+ A 1 y t 1 + + A p y pt + t
Where yt is an n1 vector of variables that are integrated of order one commonly denoted
I(1) and t is an n 1 vector of errors.

Maximum Eigen Value Test

The Eigen values are the squared canonical correlation between a linear combination of
x t
stationary

x t 1
and linear combination between non-stationary

. This interpretation is
x t 1

intuitively appealing because this correlation will be high only if the linear combination of

is itself stationary. Otherwise, a non-stationary variable cannot have a high correlation with a
stationary variable. Therefore, higher the Eigen value, higher will be the stationarity of the
25

particular linear combination of the non-stationary variable. Only those Eigen values indicate the
co-integrating relationship among the variables which are significantly different from zero. The
corresponding (normalized to a variable) Eigen vector of an Eigen value is the potential co
integrating vector . However, this vector represents a co-integrating relationship only if its

Eigen value is different from zero. Once the co-integrating vector (in the form of eigenvector) is
known, the error-correction vector can easily be estimated using its OLS estimator.
Trace Test
Maximum likelihood estimator gives us k number of Eigen-values, but all of them will not be
significantly different from zero. Let we assume only r Eigen values are different from zero.
Now there are following possibilities:
i.

r = 0, it means there is no co-integrating relationship among the variables. Therefore the

VAR should be estimated without error correction term.
xt

ii.

r = k, this can happen only when

is stationary rather than non-stationary.

iii.

r < k, then there are only r co-integrating relationship among the variables. This is the most
obvious situation and in this case only r Eigen values are different from zero and remaining
(k-r) Eigen values are non-distinguishable from zero.

Johansen suggests trace test (ML based test) to determine the number of non-zero Eigen values.
Trace test examines the null hypothesis that the co-integration rank is equal to
alternative hypothesis that co-integration rank is

. The test statistic is computed as follows:

Trace T

ln( 1 )

i r 1

26

against the

. The test is conducted in inverse sequence, x

r k , k 1, k 2....0

i.e.,

Although both of these statistics are based on likelihood ratio approach, these do not follow the

2
standard

-distribution. Rather they have non-standard distribution. Before implementing

Johansens test we have to take two important decisions: (i) what should be the order of the VAR
i.e. p, and (ii) should we include deterministic parameters with or without imposing cointegration restrictions.
Vector Error Correction Model
Once it is known that there exists a long-run relationship between the variables or not, the next
step is to check the significance of the coefficients through Ordinary Least Square Method which
will further determine the long-run causality between the variables. But if there is no cointegrating relationship between the variables, then standard Vector Autoregressive model is used
to determine the causality.
Granger Causality Test
A statistical approach proposed by Clive Granger (1969) to assess whether there is any potential
predictability power of one indicator for the other (Foresti, 2007). A time series is said to
Granger cause other if the past values of the former improve the forecast of the latter (Enders,
2008). A Granger causality test is testing for the causal relationship between two stationary series
X t and Yt in the following two equations:

Granger causality test seeks to answer whether changes in causes changes in, If, lags of the
former should be significant in the equation for the latter i.e.,

0. If this is the case and not

vice-versa (i.e., = 0) it would be said that Y t Granger causes X t causes X or that there exists
unidirectional causality from Y t

to X t . On the other hand, if X t causes Yt , lags of X tshould

27

be significant in the equation for Y t . If both sets of lags were significant, it would be said that
there exists bi-directional causality or bi-directional feedback.Also, if there exists unidirectional Granger causality from Y t to X t , then Y t is said to strongly exogenous in the
equation of X t If neither set of lags are statistically significant in the equation for the other
variable, then it is said to be independent of each other.Granger causality really means only a
correlation between the current value of one variable and the pastvalues of other. It does not
mean that movements of one variable cause movements of another.
GARCH (1, 1) Model
Volatility, as measured by variance of returns, is a crude measure of total risk of financial assets.
Since a financial time series does not have constant variance of errors, so a model that does not
assume constant variance and which describes how variance of errors evolves overtime is
required. An Auto Regressive Conditionally Heteroscedastic (ARCH) model developed by Engel
in 1982 is one of those models. Under ARCH model, the conditional variance of the error term
depends on the lagged values of the squared errors. (Brooks, 2008) Later the Generalized ARCH
model (GARCH) was developed independently by Bollerslev(1986) and Taylor(1986) where
conditional variance not only depends on lagged squared residuals but also on its own lagged
values. The GARCH model is described by two equations:

Mean Equation:
Variance Equation:

Y =C + t
2t = 0 + 1 2t1 + 2t 1

Since it is a variance equation, its value must always be strictly positive. For an ARCH model,
there has to be non-negativity constraints i.e.,

0> 0, 1

> 0.

t is known as the conditional variance. It is a one-period ahead estimate for the variance
based on any relevant past information.
2

t 1 is the last periods variance which represents the GARCH term.

28

1 t1 is the information about volatility during the previous period an ARCH term.

This is the GARCH (1,1) model as only one lag of the error term and conditional variance is
taken. Only one lag is taken because the more the parameters to be estimated, the large the
conditional variance. Also, everything else equal, the more the parameters, the more likely it is
that one or more of them will have negative estimated values. In general, a GARCH (1, 1) model
is sufficient to capture volatility clustering in the data and any higher order model is rarely used
in estimating volatility for financial series.A GARCH model is better than an ARCH model as
the former is more parsimonious than the latter and avoids over-fitting.
Hence, the model explains the current periods conditional variance is the weighted function of a
long-term average value (constant in equation), last periods forecasted conditional volatility and
last periods squared residuals. The sum of the coefficients of ARCH and GARCH term is
usually close to unity signifies that the volatility of asset returns is highly persistent. The effect of
any shock in volatility dies out a rate of (1- 1 ). If (1 + ) 1, then the effect of shock is
permanent and it is termed as non-stationarity in variance and ( 1 + ) = 1 is termed as unit
root in variance. The volatility will be defined only if ( 1 + ) < 1. Therefore, this condition is
imposed while estimating the GARCH model.

29

Chapter- 4
ANALYSIS AND
FINDINGS
30

ANALYSIS AND FINDINGS

Stationarity of Series (ADF Test)
While testing for the stationarity of series using ADF test, the hypothesis is:
H0: presence of unit root i.e., non-stationary series.
H1: no unit roots i.e., stationary series.
TABLE1: Critical Values
Mackinnon (1996) critical values

Critical Values

1%

5%

10%

-3.435161

-2.863552

-2.567891

The critical values of the ADF at levels are tabulated in Table 1.The logarithm of CNX nifty and
CRUDE OIL price series are tested for stationarity at levels. The results for same are reported in
table 2.
TABLE 2: Results of Stationarity at first difference
t-Statistic
LCNX
LCRUDE OIL

-33.24119
-38.66192
31

Prob.*
0.0000
0.0000

As can be seen by comparing tables 2 and 3 that the calculated ADF test statistic is greater than
the critical value, so the null hypothesis that there the series has one unit root is not rejected. This
implies that both the price series are non-stationary at levels. Therefore, to carry out any further
analysis, it is necessary to make the series stationary. The results for stationarity at first
difference are tabulated in table 4.
Comparing table 2 and 4 shows that the calculated ADF test statistics is less than the critical
value, so the null hypothesis of presence of one unit root is rejected. This implies that both the
series becomes stationary at first difference. Or, it can be said that the ADF test confirms the
stationarity of price returns.
Johansens Co-integration Test Results
Before testing for co-integration, it is necessary to determine the optimal lag length. As
mentioned before, the starting point of the test is the vector auto regression (VAR) of order p.
This p is the optimal lag length. The optimal lag length of VAR for the analysis is tabulated in
Table 3.
TABLE 3: Results for optimal lag length
Lag

AIC

SC

HQ

-10.88567

-10.87769*

-10.88268*

-10.89159

-10.86766

-10.88261

-10.89504

-10.85515

-10.88007

-10.90186

-10.84601

-10.88090

-10.89781

-10.82600

-10.87086

-10.89870

-10.81093

-10.86576

-10.89706

-10.79333

-10.85813

-10.90297

-10.78329

-10.85806

-10.90411*

-10.76847

-10.85321

32

Note: * indicates the optimal lag length chosen by Schwartz Bayesian criteria.

The test requires maximization of Eigen value and trace test which will determine the number of
co-integrating equations. The hypothesis used for the test is:
H0: There is no long run relationship between CRUDE OIL prices and CNX nifty .
H1: There exists a long run relationship between CRUDE OIL prices and CNX nifty.
The analysis is done and results are reported in table 4.
TABLE 4: Unrestricted Co-integration Rank Test
Number

of

Hypothesised

Maximum

Eigen

Trace Statistics

p-value

equations
None

Statistics
0.132562

291.1330

0.0001

At most 1

0.079442

107.1111

0.0000

NOTE: MacKinnon-Haug-Michelis (1999) p-values

As can be seen from the above table 4, for the periods both maximum Eigen statistics and trace
statistics have p-value less than 0.05, so the null hypothesis that there is no long run relationship
between the prices in logarithm is rejected, i.e., there exists a long-run relationship between the
two price series. However, for the null hypothesis that there exits at most one co-integration
equation between the two price series. So, finally we conclude that there is only one cointegrating equation and hence there exists a long-run relationship between prices.
GrangerCausality Results
TheprerequisiteforGrangercausalitytestisthattheanalysisisdoneonthestationaryseries.Therefore,th
e two equations forGranger causality can be written in terms of d(CNX)and d(SPOT)as follows:

33

Table 5: GrangerCausality WaldTest

Dependent variable: D(RETCNX)
Excluded

Chi-sq

df

Prob.

D(RETSPOT)

49.78480

0.0000

All

49.78480

0.0000

Dependent variable: D(RETSPOT)

Excluded

Chi-sq

df

Prob.

D(RETCNX)

20.44568

0.0000

All

20.44568

0.0000

There is unidirectional causality from crude oil of CNX return for this period. During this
period ,both the null hypothesis is rejected(p-value<0.05).This implies that there is bidirectional feedback.

GARCH (1, 1) Model Results for Presence of Volatility

Before testing for the presence of volatility, it necessary to check for volatility clustering which
describes the tendency of large changes in asset prices to be followed by large changes and small
changes by small changes.
Aforementioned the test of presence of volatility using GARCH (1, 1) consists of a mean
equation and a variance equation.
34

Rt =C+ t

Mean equation:
Variance equation:
Where,

Rt

t = 0 + 1 t1 + t 1

is the spot returns and future returns.

In the first step, using mean equation, price returns are regressed on the constant and then using
the residuals from the mean equation, the forecast variance of the current time period is predicted
using the variance equation. If (1 + ) is close to unity, then it implies persistence of high
volatility shocks. The results of GARCH (1,1) model are tabulated in table 6.
TABLE 6: GARCH (1,1) Results
Equation

MEAN

VARIANCE

Variable

Coefficient

Probability

C(1)

0.000565

0.0497

C(2)

0.010580

0.4993

C(3)

1.11E-06

0.0035

C(4)
C(5)

0.061705
0.930816

0.0000
0.0000

The above can be explained using the following equation

Ht = C(3) + C(4)*RESID(-1)^2 + C(5)*GARCH(-1)
Where, Ht is the variance of the residual term i.e., error term derived from the mean equationC(3)
is the constant term.RESID(-1)^2 = previous periods squared residual (error derived from the
mean equation). It is known as previous days dependent variable information about volatility.
This is the ARCH term.

35

.16
.12
.08
.04
.16

.00

.12

-.04

.08

-.08

.04
.00
-.04
-.08
250

500
Residual

750
Actual

1000

1250

Fitted

In the table 6, C(1) and C(2) (coefficient of dependent variable) are the coefficients of the mean
equation.The interest lies in the significance of the ARCH and GARCH coefficients. The
coefficients, C(4) and C(5) i.e., ARCH and GARCH coefficients respectively are significant.
This implies that both the last periods squared residuals and the conditional variance are internal
shocks to the volatility of the dependent variable. In the analysis period, the sum of coefficients
is 0.97 (approx) which is close to unity, implying persistence of high volatility during The
analysis period.
Results show that the volatility is present in the index due to changes in prices of gold. The
results for domestic Indian prices indicate the same pattern. This implies that India follows more
or less the same pattern as world prices, so the world prices are not considered in the analysis.

36

CHAPTER 5
LIMITATIONS
37

Limitations of the Study

This Project study is limited to the samples

The considered data are secondary in nature; not primary. The used data in this Project
study is daily data .
The data collected from January 2009 to march 2014 only.
The market affecting factor like political scenarios, natural calamities, international
economic events, war, etc are not taken into in this Project study.
Study of awareness and perception of the investor is only based on sample size.
Limited resources were available to collect the information about commodity trading

38

Chapter 6
CONCLUSION
39

CONCLUSION
For the periods both maximum Eigen statistics and trace statistics have p-value less than

0.05, so the null hypothesis that there is no long run relationship between the prices in
logarithm is rejected, i.e., there exists a long-run relationship between the two price series
we conclude that there is only one co-integrating equation and hence there exists a longrun relationship between prices.
There is unidirectional causality from crude oil of CNX return for this period. During this
period ,both the null hypothesis is rejected(p-value<0.05).This implies that there is bidirectional feedback.
In the analysis period, the sum of coefficients is 0.97 (approx) which is close to unity,
implying persistence of high volatility during The analysis period.
It implies that Indian Commodity Market closely follows the direction of Indian Stock
Market
The direction of the market movements of both the Indian Commodity Market and Indian
Stock Market are always same. If Indian Stock Market is in upward direction, Indian
Commodity Market moves in the same upward direction. If Indian Stock Market is in
downward direction, Indian Commodity Market moves in the same downward direction.

40

BIBLIOGRAPHY
Websites :
1. http://www.smctradeonline.com/commodities-spot-prices.aspx
2. http://finance.yahoo.com/q/hp?
s=NOR&a=00&b=1&c=2009&d=02&e=31&f=2014&g=d
3. http://www.investing.com/commodities/copper-historical-data
4. http://www.investing.com/commodities/crude-oil-historical-data
5. http://www.livecharts.co.uk/futures_commodities/nyse_gold_prices_historical.php?
type_symbol=futures_gc&start=30
6. http://profit.ndtv.com/market/domestic-index-bse_sensex

41