An empirical evaluation of treasury-bill futures market efficiency: Evidence from forecast efficiency tests
✍ Scribed by S. Scott MacDonald; Scott E. Hein
- Publisher
- John Wiley and Sons
- Year
- 1993
- Tongue
- English
- Weight
- 782 KB
- Volume
- 13
- Category
- Article
- ISSN
- 0270-7314
No coin nor oath required. For personal study only.
✦ Synopsis
Introduction
any studies of futures market efficiency have used one of two basic methods M to examine market efficiency. The first method, widely used to examine the efficiency of commodity futures, is to regress the actual realized delivery-day spot rate against an earlier observed futures price. If the futures market is allocationally efficient (ignoring transaction costs), futures prices should fully and instantaneously reflect all available relevant public information. Assuming rational expectations, the constant and slope term in the preceding regression should not be different from zero and one, respectively. This test of the efficient market hypothesis has the advantage of being simple and having universal appeal in application to all futures market instruments. However, this method can suffer from serious statistical problems as outlined below. Such problems can render the OLS estimation results meaningless.
A second method of testing for futures market efficiency, widely used in examining the efficiency of the Treasury-bill future market, is to compare a futures rate with an arbitrageable alternative rate, such as a forward rate; e.g., Poole (1978), Vignola and Dale (1980), Rendleman and Carabini (1979), andKawaller andKoch (1984). These studies primarily compare futures and forward rates as a means of testing futures market efficiency. If these two rates are found to be statistically different from one another, then one or both markets is said to be inefficient. Many such studies, but not all, find futures and forward rates are statistically different and conclude that the Treasury-bill futures market is inefficient. This method, however, does not adequately determine which of the two markets is inefficient.