INTRODUCTION he efficiency of the futures or forward market in commodities or currency exchange has been extensively tested using the model st Po + PlFt-1 + Et (1) where S, is the natural logarithm of the spot price in period t and F,-1 is the analogously defined forward or futures price on a one period contract in period t - 1. The joint restriction of market efficiency and risk neutrality implies coefficient values of PO = 0 and = 1. These restrictions are based on a definition of market efficiency that argues that price changes from one period to the next should be unpredictable given current information. If the futures price, F , - l , contains all relevant information to forecast the next periodâs spot price, S,, as this definition of market efficiency implies, then F,-1 should be an unbiased predictor of the future spot price. This represents Famaâs (1970) notion of weak form efficiency. Several studies have examined this efficient market definition for commodities and foreign exchange futures markets [e.g., Baillie and Myers (1991); Chowdhury (1991); Kroner and Sultan (1991)l with mixed results. In each study, the non-stationarity of the underlying univariate data generating processes (DGP)
The Journal of Futures Markets – Wiley
Published: Dec 1, 1993
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