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 âsimple efficiencyâ hypothesis by Hansen and Hodrick (1980) and the âspeculative efficiencyâ hypothesis by Bilson (1981), since the test for unbiasedness represents a joint test of market efficiency and no-risk premium.â In testing the parameter restriction in eq. (l), the issue arises regarding whether or not the price series is stationary. The
The Journal of Futures Markets – Wiley
Published: Oct 1, 1991
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