A cointegration test for market efficiency

A cointegration test for market efficiency Michael Lai INTRODUCTION he efficiency of the forward or futures market is often examined based on the model S, = a (1) where S , is the spot price at time t, F , - , , is the price at time t - 1 for the forward or futures contract maturing at time r, E, is an error term with mean zero and finite variance, and a and b are constant coefficients. Under the hypothesis of market efficiency, the market price should fully reflect available information so that there exists no strategy from which traders can profit consistently by speculating in the forward or futures market on future levels of the spot price. Efficiency, so defined, implies a testable restriction that a = 0 and b = 1 in eq. (l), which is generally referred to as the unbiasedness hypothesis. This hypothesis is called the “simple efficiency” hypothesis by Hansen and Hodrick (1980) and the “speculative efficiency” hypothesis by Bilson (1981), since the test for unbiasedness represents a joint test of market efficiency and no-risk premium.’ In testing the parameter restriction in eq. (l), the issue arises regarding whether or not the price series is stationary. The http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Futures Markets Wiley

A cointegration test for market efficiency

The Journal of Futures Markets, Volume 11 (5) – Oct 1, 1991

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Publisher
Wiley
Copyright
Copyright © 1991 Wiley Periodicals, Inc., A Wiley Company
ISSN
0270-7314
eISSN
1096-9934
DOI
10.1002/fut.3990110505
Publisher site
See Article on Publisher Site

Abstract

Michael Lai INTRODUCTION he efficiency of the forward or futures market is often examined based on the model S, = a (1) where S , is the spot price at time t, F , - , , is the price at time t - 1 for the forward or futures contract maturing at time r, E, is an error term with mean zero and finite variance, and a and b are constant coefficients. Under the hypothesis of market efficiency, the market price should fully reflect available information so that there exists no strategy from which traders can profit consistently by speculating in the forward or futures market on future levels of the spot price. Efficiency, so defined, implies a testable restriction that a = 0 and b = 1 in eq. (l), which is generally referred to as the unbiasedness hypothesis. This hypothesis is called the “simple efficiency” hypothesis by Hansen and Hodrick (1980) and the “speculative efficiency” hypothesis by Bilson (1981), since the test for unbiasedness represents a joint test of market efficiency and no-risk premium.’ In testing the parameter restriction in eq. (l), the issue arises regarding whether or not the price series is stationary. The

Journal

The Journal of Futures MarketsWiley

Published: Oct 1, 1991

References

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