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Testing the Efficient Market Hypothesis in Conditionally Heteroskedastic Futures Markets

Authors

  • Joakim Westerlund,

    Corresponding author
    • Joakim Westerlund and Paresh Narayan are collocated at the Faculty of Business and Law, School of Accounting, Economics and Finance, Deakin University, Melbourne Burwood Campus, VIC, Australia
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  • Paresh Narayan

    1. Joakim Westerlund and Paresh Narayan are collocated at the Faculty of Business and Law, School of Accounting, Economics and Finance, Deakin University, Melbourne Burwood Campus, VIC, Australia
    Search for more papers by this author

  • A version of the paper was presented at a symposium on Financial Econometrics of Derivative Securities and Markets hosted by Deakin University. The authors would like to thank symposium participants, and in particular Robert Webb (the editor) for many valuable comments and suggestions.

Correspondence author, Deakin University, Faculty of Business and Law, School of Accounting, Economics and Finance, Melbourne Burwood Campus, 221 Burwood Highway, VIC 3125, Australia. Tel: +61-3-924-46973, Fax: +61-3-924-46283, e-mail: j.westerlund@deakin.edu.au

Abstract

Most empirical evidence suggests that the efficient market hypothesis, stating that spot and futures prices should cointegrate with a unit slope on futures prices, does not hold. These results have recently motivated researchers to start looking for more “informative” tests, and the current paper takes a step in this direction. However, unlike existing tests, the test proposed here exploits the information contained in the heteroskedasticity of the data, which is expected to lead to more accurate inference, a result that is confirmed by our findings. © 2013 Wiley Periodicals, Inc. Jrl Fut Mark

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