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A Factor Analytical Approach to the Efficient Futures Market Hypothesis

Westerlund, Joakim LU ; Norkute, Milda LU and Narayan, Paresh (2015) In Journal of Futures Markets 35(4). p.357-370
Abstract
Most empirical evidence suggests that the efficient futures market hypothesis, henceforth referred to as EFMH, stating that spot and futures prices should cointegrate with a unit slope on futures prices, does not hold, a finding at odds with many theoretical models. This paper argues that these results can be attributed in part to the low power of univariate tests, and that the use of panel data can generate more powerful tests. The current paper can be seen as a step in this direction. In particular, a newly developed factor analytical approach is employed, which is very general and, in addition, free of the otherwise so common incidental parameters bias in the presence of fixed effects. The approach is applied to a large panel covering... (More)
Most empirical evidence suggests that the efficient futures market hypothesis, henceforth referred to as EFMH, stating that spot and futures prices should cointegrate with a unit slope on futures prices, does not hold, a finding at odds with many theoretical models. This paper argues that these results can be attributed in part to the low power of univariate tests, and that the use of panel data can generate more powerful tests. The current paper can be seen as a step in this direction. In particular, a newly developed factor analytical approach is employed, which is very general and, in addition, free of the otherwise so common incidental parameters bias in the presence of fixed effects. The approach is applied to a large panel covering 17 commodities between March 1991 and
August 2012. The evidence suggests that the EFMH cannot be rejected once the panel evidence has been taken into account. (Less)
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author
organization
publishing date
type
Contribution to journal
publication status
published
subject
keywords
Dynamic panel data models, Unit root, Factor analytical method, Efficient market hypothesis, Futures markets.
in
Journal of Futures Markets
volume
35
issue
4
pages
357 - 370
publisher
John Wiley & Sons
external identifiers
  • wos:000350997400005
  • scopus:84924048074
ISSN
1096-9934
DOI
10.1002/fut.21687
language
English
LU publication?
yes
id
f2fcef75-ab4e-4eff-bf0e-bf1348f063de (old id 4588916)
date added to LUP
2014-08-20 11:03:40
date last changed
2018-05-29 10:46:57
@article{f2fcef75-ab4e-4eff-bf0e-bf1348f063de,
  abstract     = {Most empirical evidence suggests that the efficient futures market hypothesis, henceforth referred to as EFMH, stating that spot and futures prices should cointegrate with a unit slope on futures prices, does not hold, a finding at odds with many theoretical models. This paper argues that these results can be attributed in part to the low power of univariate tests, and that the use of panel data can generate more powerful tests. The current paper can be seen as a step in this direction. In particular, a newly developed factor analytical approach is employed, which is very general and, in addition, free of the otherwise so common incidental parameters bias in the presence of fixed effects. The approach is applied to a large panel covering 17 commodities between March 1991 and<br/>August 2012. The evidence suggests that the EFMH cannot be rejected once the panel  evidence has been taken into account.},
  author       = {Westerlund, Joakim and Norkute, Milda and Narayan, Paresh},
  issn         = {1096-9934},
  keyword      = {Dynamic panel data models,Unit root,Factor analytical method,Efficient market hypothesis,Futures markets.},
  language     = {eng},
  number       = {4},
  pages        = {357--370},
  publisher    = {John Wiley & Sons},
  series       = {Journal of Futures Markets},
  title        = {A Factor Analytical Approach to the Efficient Futures Market Hypothesis},
  url          = {http://dx.doi.org/10.1002/fut.21687},
  volume       = {35},
  year         = {2015},
}