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Are Co‐integrated Stock Prices Consistent with the Efficient Market Hypothesis?

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  • EDGAR J. WILSON
  • HAZEM A. MARASHDEH

Abstract

This paper responds to the unsatisfactory argument that there is no correspondence between co‐integration and the efficient market hypothesis. A law of one co‐integrating vector of prices is proposed for the exchange rate and domestic and overseas stock prices. Markets must therefore be efficient in long‐run equilibrium because no arbitrage opportunities exist. However, arbitrage activity via the disequilibrium error correction allows above‐average (risk‐adjusted) returns to be earned in the short run. The elimination of these arbitrage opportunities means that stock market inefficiency in the short run ensures stock market efficiency in the long run.

Suggested Citation

  • Edgar J. Wilson & Hazem A. Marashdeh, 2007. "Are Co‐integrated Stock Prices Consistent with the Efficient Market Hypothesis?," The Economic Record, The Economic Society of Australia, vol. 83(s1), pages 87-93, September.
    • Handle: RePEc:bla:ecorec:v:83:y:2007:i:s1:p:s87-s93
    DOI: 10.1111/j.1475-4932.2007.00409.x
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    References listed on IDEAS

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    1. E. J. Wilson & K. Jayanthakumaran & R. Verma, 2012. "Demographics, Labor Mobility, and Productivity," Development Economics Working Papers 23348, East Asian Bureau of Economic Research.
    2. Adam Karp & Gary Van Vuuren, 2019. "Investment Implications Of The Fractal Market Hypothesis," Annals of Financial Economics (AFE), World Scientific Publishing Co. Pte. Ltd., vol. 14(01), pages 1-27, March.

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