A cointegration test for oil futures market efficiency

A cointegration test for oil futures market efficiency 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 period’s 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 Fama’s (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) http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Futures Markets Wiley

A cointegration test for oil futures market efficiency

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Publisher
Wiley
Copyright
Copyright © 1993 Wiley Periodicals, Inc., A Wiley Company
ISSN
0270-7314
eISSN
1096-9934
DOI
10.1002/fut.3990130810
Publisher site
See Article on Publisher Site

Abstract

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 period’s 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 Fama’s (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)

Journal

The Journal of Futures MarketsWiley

Published: Dec 1, 1993

References

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