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Estimating Forward Pricing Function: How Efficient is Indian Stock Index Futures Market?

This paper uses Indian stock futures data to explore unbiased expectations and efficient market hypothesis. Having experienced voluminous transactions within a short time span after its establishment, the Indian stock futures market provides an unparalleled case for exploring these issues involving expectation and efficiency. Besides analyzing market efficiency between cash and futures prices using cointegration and error correction frameworks, the efficiency hypothesis is also investigated after explicitly modeling the underlying state of the market (expansion or contraction) through the first-order Markov switching set-up. The results based on Markov switching analysis show that relatively longer time horizon is more effective in eliminating arbitrage opportunities than the short run.

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Paper provided by Deakin University, Faculty of Business and Law, School of Accounting, Economics and Finance in its series Accounting, Finance, Financial Planning and Insurance Series with number 2006_02.

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Length: 31 pages
Date of creation: 27 May 2006
Date of revision:
Handle: RePEc:dkn:acctwp:aef_2006_02
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  1. Dimitris Kenourgios, 2005. "Testing Efficiency And The Unbiasedness Hypothesis Of The Emerging Greek Futures Market," Finance 0512015, EconWPA.
  2. Perron, P., 1994. "Further Evidence on Breaking Trend Functions in Macroeconomic Variables," Cahiers de recherche 9421, Universite de Montreal, Departement de sciences economiques.
  3. Dimitris Kenourgios & Aristeidis Samitas, 2005. "Testing Efficiency Of The Copper Futures Market: New Evidence From London Metal Exchange," Finance 0512010, EconWPA.
  4. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-80, November.
  5. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
  6. Craig S. Hakkio & Mark Rush, 1987. "Market efficiency and cointegration," Research Working Paper 87-05, Federal Reserve Bank of Kansas City.
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