Regime switching and cointegration tests of the efficiency of futures markets

Ying‐Foon Chow

Journal of Futures Markets, 1998, vol. 18, issue 8, 871-901

Abstract: Many researchers have found that spot and futures prices are not cointegrated in some commodity markets, or they are cointegrated but not with a cointegrating vector (1, −1). One interpretation is that disturbances to excess returns have a unit root persistence, which implies that spot and futures prices do not move together one‐for‐one in the long run. To provide an alternative explanation for this finding, this article proposes a regime switching model of spot prices that can be viewed in the same framework as Fama and French (1988). Based on this model, Monte Carlo experiments are performed to show that tests for cointegration and estimates of the cointegrating vector are likely to be biased when a sample contains infrequent changes in regime. Taking these shifts into account, the null hypothesis that spot and futures prices are cointegrated and move together one‐for‐one in the long run can no longer be rejected. © 1998 John Wiley & Sons, Inc. Jrl Fut Mark 18:871–901, 1998

Date: 1998
References: Add references at CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
http://hdl.handle.net/

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wly:jfutmk:v:18:y:1998:i:8:p:871-901

Ordering information: This journal article can be ordered from
http://www.blackwell ... bs.asp?ref=0270-7314

Access Statistics for this article

Journal of Futures Markets is currently edited by Robert I. Webb

More articles in Journal of Futures Markets from John Wiley & Sons, Ltd.
Bibliographic data for series maintained by Wiley Content Delivery ().