Noninformative and informative tests of efficiency in three energy futures markets

✍ Scribed by Peroni, Emilio; McNown, Robert

• Publisher: John Wiley and Sons
• Year: 1998
• Tongue: English
• Weight: 385 KB
• Volume: 18
• Category: Article
• ISSN: 0270-7314
• DOI: 10.1002/(sici)1096-9934(199812)18:8<939::aid-fut4>3.0.co;2-4

✦ Synopsis

This article presents a critique of tests of market efficiency commonly applied to energy futures markets. Most of this literature fails to deal adequately with the endogeneity, nonstationarity, and cointegration characteristics of spot and futures prices, resulting in tests that are not informative about market efficiency. Consistent with this literature, application of these noninformative tests to spot and futures prices from three energy markets is generally not supportive of market efficiency. The article also presents two alternative tests of efficiency that properly deal with the stochastic features of these price series. Nonstationary data can be modeled with cointegration methods, allowing valid tests of the efficiency hypothesis. Alternatively, testing the equivalence of the data generation processes of the spot and futures prices provides an informative approach to efficiency testing with stationary data that does not suffer from endogeneity problems. Application of these two tests is largely supportive of weak and semistrong efficiency in three energy futures markets.