Regime switching and cointegration tests of the efficiency of futures markets

/ SummaryThe market for US equity indexes has traditionally comprised floor-traded index futures contracts and the individual markets for the component stocks. This picture has been altered by the advent of exchange-traded funds (ETFs) that mirror the indexes, electronically-traded, small-denomination ("E-mini") futures contracts, and (for the S&P 500) a family of sector ETFs that break the index into nine components. This paper empirically investigates price discovery (price leadership) in this new environment. The specifications are estimated at very fine (up to one second) time resolution. The principal findings are as follows.• For the S&P 500 and Nasdaq-100 indexes, the index market comprises an ETF, a regular floor-traded futures contract and an E-mini futures contract. The paper finds that most of the price discovery for both indexes occurs in the E-mini markets: price changes in the E-mini futures prices generally lead those in the regular futures contracts and the ETFs.• The market in the S&P 400 MidCap index comprises only the ETF and the regular futures contract. Both securities contribute substantially to price discovery, but the ETF appears to dominate.• The sector ETFs can closely replicate the S&P 500 ETF. Nevertheless, trading activity across the sector ETFs varies considerably. The most actively traded sector (technology) contributes a modest amount to price discovery in the overall index. The other sector ETFs play only a minor role.

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“…In these studies, cointegration arises from some form of the expectations hypothesis. See Chow (1998) Bartlett (1950).…”

Section: A Cointegration In Futures/spot Specificationsmentioning

confidence: 99%

Intraday Price Formation in US Equity Index Markets

Hasbrouck

2001

SSRN Journal

108

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“…Typically, the empirical analysis is based on either daily data (see, e.g., Baillie & Myers, ; Bessler & Covey, ; Schroeder & Goodwin, ) or monthly data (see Chowdhury, ; Krehbiel & Adkins, ; Quan, ; Chow, ). We use daily data, which are more likely to be characterized by ARCH.…”

Section: Resultsmentioning

confidence: 99%

“…Quan () do, and find the slope coefficient to be 0.48, which is substantially lower than our (full‐sample) estimate of 1.047. As for the other commodities, although Krehbiel and Adkins () estimate the slope coefficient to be 1.005 for gold and silver, and 1.009 for platinum, Chow () estimates the slope coefficients of gold, silver, and platinum to be 0.997, 0.999, and 0.990, respectively. Thus, although our estimate for oil differs markedly from previous results, the results for gold, silver, and platinum are largely consistent with the existing evidence.…”

Section: Resultsmentioning

confidence: 99%

Testing the Efficient Market Hypothesis in Conditionally Heteroskedastic Futures Markets

Westerlund

Narayan

2013

Journal of Futures Markets

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Most empirical evidence suggests that the efficient market hypothesis, stating that spot and futures prices should cointegrate with a unit slope on futures prices, does not hold. These results have recently motivated researchers to start looking for more “informative” tests, and the current paper takes a step in this direction. However, unlike existing tests, the test proposed here exploits the information contained in the heteroskedasticity of the data, which is expected to lead to more accurate inference, a result that is confirmed by our findings. © 2013 Wiley Periodicals, Inc. Jrl Fut Mark

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“…Researchers have tested whether spot and futures prices are cointegrated to investigate price discovery and market efficiency in a variety of markets. Examples include Bessler and Covey (), Chowdhury (), Lai and Lai (), Fortenbery and Zapata (), Schwarz and Szakmary (), Chow (), and Yang, Bessler, and Leatham (). However, such cointegration tests are based on nonstationarity of price series, and therefore require dependable tests of a unit root in order to proceed.…”

Section: Introductionmentioning

confidence: 99%

The impact of data frequency on market efficiency tests of commodity futures prices

Dorfman

Karali

2018

Journal of Futures Markets

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We investigate the impacts of sampling frequency and model specification uncertainty on the outcome of unit root tests, commonly employed as market efficiency tests, using a new, robust Bayesian test on seven commodity futures prices at three different sample frequencies (daily, weekly, and monthly). Using Bayesian model averaging to account for different possible mean and error variance specifications, we show that sample frequency does affect the unit root test results: the higher the frequency, the higher the support for stationarity. We further show that not accounting for model specification uncertainty can produce unit root test results that are not robust.

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Regime switching and cointegration tests of the efficiency of futures markets

Cited by 24 publications

References 32 publications

Intraday Price Formation in US Equity Index Markets

Intraday Price Formation in US Equity Index Markets

Testing the Efficient Market Hypothesis in Conditionally Heteroskedastic Futures Markets

The impact of data frequency on market efficiency tests of commodity futures prices

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