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

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

Loading next page...
 
/lp/wiley/futures-market-efficiency-evidence-from-cointegration-tests-cYix8uQkx4
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 MarketsWiley

Published: Oct 1, 1991

References

You’re reading a free preview. Subscribe to read the entire article.


DeepDyve is your
personal research library

It’s your single place to instantly
discover and read the research
that matters to you.

Enjoy affordable access to
over 18 million articles from more than
15,000 peer-reviewed journals.

All for just $49/month

Explore the DeepDyve Library

Search

Query the DeepDyve database, plus search all of PubMed and Google Scholar seamlessly

Organize

Save any article or search result from DeepDyve, PubMed, and Google Scholar... all in one place.

Access

Get unlimited, online access to over 18 million full-text articles from more than 15,000 scientific journals.

Your journals are on DeepDyve

Read from thousands of the leading scholarly journals from SpringerNature, Wiley-Blackwell, Oxford University Press and more.

All the latest content is available, no embargo periods.

See the journals in your area

DeepDyve

Freelancer

DeepDyve

Pro

Price

FREE

$49/month
$360/year

Save searches from
Google Scholar,
PubMed

Create folders to
organize your research

Export folders, citations

Read DeepDyve articles

Abstract access only

Unlimited access to over
18 million full-text articles

Print

20 pages / month

PDF Discount

20% off