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Futures market efficiency: Evidence from cointegration tests

Futures market efficiency: Evidence from cointegration tests his article has two major aims: first, the “efficient market” hypothesis is examined for four nonferrous metals- copper, lead, tin, and zinc -traded in the London Metal Exchange (LME). A futures market is efficient relative to an information set such that only new unanticipated information leads to a price change. Second, the recently developed cointegration theory is employed to test efficiency in these markets.’ A problem in testing market efficiency is that financial price series are generally not stationary? Consequently, conventional statistical procedures are no longer appropriate for testing market efficiency, because they tend to bias toward incorrectly rejecting efficiency. The use of a cointegration approach properly accounts for the nonstationary behavior of futures and spot price series. Cointegration between these two variables implies that they never drift far apart. The market efficiency hypothesis, on the other hand, requires that the current futures price and the future spot price of a commodity are “close together.” If these two price series are not cointegrated, they will tend to deviate apart without bound, which is contrary to the market efficiency hypothesis. On the other hand, if, for example, the spot prices in two different markets are cointegrated, then one of http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Futures Markets Wiley

Futures market efficiency: Evidence from cointegration tests

Chowdhury, Abdur R.
The Journal of Futures Markets , Volume 11 (5) – Oct 1, 1991
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References (41)

Publisher
Wiley
Copyright
Copyright © 1991 Wiley Periodicals, Inc., A Wiley Company
ISSN
0270-7314
eISSN
1096-9934
DOI
10.1002/fut.3990110506
Publisher site
See Article on Publisher Site

Abstract

his article has two major aims: first, the “efficient market” hypothesis is examined for four nonferrous metals- copper, lead, tin, and zinc -traded in the London Metal Exchange (LME). A futures market is efficient relative to an information set such that only new unanticipated information leads to a price change. Second, the recently developed cointegration theory is employed to test efficiency in these markets.’ A problem in testing market efficiency is that financial price series are generally not stationary? Consequently, conventional statistical procedures are no longer appropriate for testing market efficiency, because they tend to bias toward incorrectly rejecting efficiency. The use of a cointegration approach properly accounts for the nonstationary behavior of futures and spot price series. Cointegration between these two variables implies that they never drift far apart. The market efficiency hypothesis, on the other hand, requires that the current futures price and the future spot price of a commodity are “close together.” If these two price series are not cointegrated, they will tend to deviate apart without bound, which is contrary to the market efficiency hypothesis. On the other hand, if, for example, the spot prices in two different markets are cointegrated, then one of

Journal

The Journal of Futures Markets – Wiley

Published: Oct 1, 1991

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