Co-integration and Causal Relationship between Energy Commodities and Energy Stock Index: Empirical Evidence from India

Abstract

This article's primary objective is to evaluate, within the Indian setting, the degree to which energy commodities and energy stock prices correlate and are causally related. Weekly spot price data has been sourced from the Multi Commodity Exchange and the National Stock Exchange, which spans from January 2007 to December 2021. This study employs Auto-regressive Distributive (ARDL) Bound test along with Johansen co-integration approach to understand the co-integration between the series under study. The findings support the idea that the energy stock index listed on the National Stock Exchange (NSE) and the energy commodities traded on the Multi Commodity Exchange (MCX) do not exhibit any co-integration. Furthermore, to investigate the cause-and-effect connection between the energy stock index and energy commodities, Granger Causality test has been utilised, which was introduced by Toda and Yamamoto. The results demonstrate that there is no causal relationship between MCX energy commodities and the NSE energy stock index. Thus, the nonexistence of cointegration and causality between NSE energy index and energy commodities provides portfolio diversification opportunities for the investors to hedge their risk by investing in both energy commodities and energy stock index. Policymakers need to promote deeper integration among these markets by making more regulatory and accounting changes.