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A Factor Analytical Approach to the Efficient Futures Market Hypothesis

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  • Joakim Westerlund
  • Milda Norkute
  • Paresh Kumar Narayan

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 article 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 article 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. © 2014 Wiley Periodicals, Inc. Jrl Fut Mark 35:357–370, 2015

Suggested Citation

  • Joakim Westerlund & Milda Norkute & Paresh Kumar Narayan, 2015. "A Factor Analytical Approach to the Efficient Futures Market Hypothesis," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 35(4), pages 357-370, April.
    • Handle: RePEc:wly:jfutmk:v:35:y:2015:i:4:p:357-370
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    Cited by:

    1. Narayan, Paresh Kumar & Liu, Ruipeng, 2015. "A unit root model for trending time-series energy variables," Energy Economics, Elsevier, vol. 50(C), pages 391-402.
    2. Zhang, Yue-Jun & Yao, Ting, 2016. "Interpreting the movement of oil prices: Driven by fundamentals or bubbles?," Economic Modelling, Elsevier, vol. 55(C), pages 226-240.
    3. Hoang, Thi-Hong-Van & Wong, Wing-Keung & Zhu, Zhenzhen, 2015. "Is gold different for risk-averse and risk-seeking investors? An empirical analysis of the Shanghai Gold Exchange," Economic Modelling, Elsevier, vol. 50(C), pages 200-211.
    4. Thi Hong Van Hoang & Amine Lahiani & David Heller, 2016. "Is gold a hedge against inflation? New evidence from a nonlinear ARDL approach," Post-Print hal-02012307, HAL.
    5. Tong, Bin & Diao, Xundi & Wu, Chongfeng, 2015. "Modeling asymmetric and dynamic dependence of overnight and daytime returns: An empirical evidence from China Banking Sector," Economic Modelling, Elsevier, vol. 51(C), pages 366-382.
    6. Kagraoka, Yusho, 2016. "Common dynamic factors in driving commodity prices: Implications of a generalized dynamic factor model," Economic Modelling, Elsevier, vol. 52(PB), pages 609-617.
    7. Hoang, Thi Hong Van & Lahiani, Amine & Heller, David, 2016. "Is gold a hedge against inflation? New evidence from a nonlinear ARDL approach," Economic Modelling, Elsevier, vol. 54(C), pages 54-66.
    8. Vidal-García, Javier & Vidal, Marta & Boubaker, Sabri & Uddin, Gazi Salah, 2016. "The short-term persistence of international mutual fund performance," Economic Modelling, Elsevier, vol. 52(PB), pages 926-938.
    9. Apergis, Nicholas & Eleftheriou, Sofia, 2016. "Gold returns: Do business cycle asymmetries matter? Evidence from an international country sample," Economic Modelling, Elsevier, vol. 57(C), pages 164-170.
    10. Donald Lien & Zijun Wang, 2016. "Estimation of Market Information Shares: A Comparison," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 36(11), pages 1108-1124, November.

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