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Efficiency tests of the UK financial futures markets and the impact of electronic trading systems

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  • Twm Evans
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    Abstract

    This paper undertakes tests for market efficiency of three UK financial futures contracts: FTSE100 futures (stock index futures), Long Gilt (bond futures), Short Sterling (interest rate futures) and also examines the impact of the introduction of electronic trading system on their market efficiency. The analysis is based on the notion of weak-form informational efficiency of the Efficient Market Hypothesis (EMH). For robustness, the study employs three test methods, ADF unit root test, KPSS test and Lo & MacKinlay Variance Ratio test, to investigate the randomness of the futures price fluctuation, which generally signifies market efficiency. Any evidence of market weak-form inefficiency implies that the futures prices do not follow a random walk process and the past price of the financial instrument can be used to forecast the futures price to obtain superior profit. The results show that the three markets under investigation are weak-form informational efficient. Before the introduction of electronic trading system, the UK bond futures market is relatively the most efficient among the three markets under investigation. After automation, the efficiency of FTSE100 futures contract improves to become the most efficient among the three markets under investigation.

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    File URL: http://www.tandfonline.com/doi/abs/10.1080/09603100500438767
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    Bibliographic Info

    Article provided by Taylor & Francis Journals in its journal Applied Financial Economics.

    Volume (Year): 16 (2006)
    Issue (Month): 17 ()
    Pages: 1273-1283

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    Handle: RePEc:taf:apfiec:v:16:y:2006:i:17:p:1273-1283

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    Web page: http://www.tandfonline.com/RAFE20

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    1. M. Magnusson & B. Wydick, 2002. "How Efficient are Africa's Emerging Stock Markets?," Journal of Development Studies, Taylor & Francis Journals, vol. 38(4), pages 141-156.
    2. Madhavan, Ananth & Richardson, Matthew & Roomans, Mark, 1997. "Why Do Security Prices Change? A Transaction-Level Analysis of NYSE Stocks," Review of Financial Studies, Society for Financial Studies, vol. 10(4), pages 1035-64.
    3. Kwiatkowski, Denis & Phillips, Peter C. B. & Schmidt, Peter & Shin, Yongcheol, 1992. "Testing the null hypothesis of stationarity against the alternative of a unit root : How sure are we that economic time series have a unit root?," Journal of Econometrics, Elsevier, vol. 54(1-3), pages 159-178.
    4. Nelson, Charles R. & Plosser, Charles I., 1982. "Trends and random walks in macroeconmic time series : Some evidence and implications," Journal of Monetary Economics, Elsevier, vol. 10(2), pages 139-162.
    5. Peter Huber, 1997. "Stock market returns in thin markets: evidence from the Vienna Stock Exchange," Applied Financial Economics, Taylor & Francis Journals, vol. 7(5), pages 493-498.
    6. Cutler, David M & Poterba, James M & Summers, Lawrence H, 1990. "Speculative Dynamics and the Role of Feedback Traders," American Economic Review, American Economic Association, vol. 80(2), pages 63-68, May.
    7. Kuo-Ping Chang & Kuo-Shiuan Ting, 2000. "A variance ratio test of the random walk hypothesis for Taiwan's stock market," Applied Financial Economics, Taylor & Francis Journals, vol. 10(5), pages 525-532.
    8. Lo, Andrew W. & MacKinlay, A. Craig, 1989. "The size and power of the variance ratio test in finite samples : A Monte Carlo investigation," Journal of Econometrics, Elsevier, vol. 40(2), pages 203-238, February.
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    Cited by:
    1. Jian Zhang & Lee W. Sanning & Sherrill Shaffer, 2010. "Market Efficiency Test in the VIX Futures Market," CAMA Working Papers 2010-08, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    2. Abdul Haque & Hung-Chun Liu & Fakhar-Un-Nisa, 2011. "Testing the Weak Form Efficiency of Pakistani Stock Market (2000–2010)," International Journal of Economics and Financial Issues, Econjournals, vol. 1(4), pages 153-162.
    3. Michael Ye & John Zyren & Joanne Shore & Thomas Lee, 2010. "Crude Oil Futures as an Indicator of Market Changes: A Graphical Analysis," International Advances in Economic Research, Springer, vol. 16(3), pages 257-268, August.
    4. Rompotis, Gerasimos G., 2011. "Testing weak-form efficiency of exchange traded funds market," MPRA Paper 36020, University Library of Munich, Germany.

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