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Testing commodity futures market efficiency under time-varying risk premiums and heteroscedastic prices

Duminda Kuruppuarachchi, Hai Lin and I.M. Premachandra

Economic Modelling, 2019, vol. 77, issue C, 92-112

Abstract: We propose a novel test to measure market efficiency while estimating the time-varying risk premiums of commodity futures, given that the prices are heteroscedastic. The risk premium is estimated using a state-space model with a Kalman filter modified for heteroscedasticity. Using 79 commodity futures traded on 16 exchanges during the period 2000–2014 and a Monte Carlo simulation, we demonstrate that the proposal produces robust results compared with conventional approaches. The global financial crisis has improved the efficiency and affected the trading volumes of commodity futures, but it has had no effect on the average or the volatility of risk premiums.

Keywords: Commodity futures; Market efficiency; Futures risk premium; State-space model; Kalman filter (search for similar items in EconPapers)
JEL-codes: G13 G14 G15 (search for similar items in EconPapers)
Date: 2019
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