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Economic Significance of the Predictable Movements in Futures Returns
Author(s) -
Miffre Joelle
Publication year - 2002
Publication title -
economic notes
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.274
H-Index - 19
eISSN - 1468-0300
pISSN - 0391-5026
DOI - 10.1111/1468-0300.00075
Subject(s) - inefficiency , futures contract , economics , financial economics , market efficiency , investment (military) , risk premium , econometrics , trading strategy , efficient market hypothesis , microeconomics , stock market , paleontology , horse , politics , political science , law , biology
This paper tests whether the variation in expected futures returns reflects rational pricing in an efficient market or weak‐form market inefficiency. The issue is investigated by looking at the abnormal performance of a trading rule based on available information. Once one allows for time‐varying risk and time‐varying risk premia, the investment strategy can be used consistently to generate abnormal returns in seven out of 26 markets. With relatively few exceptions therefore, the predictable movements in futures returns reflect weak‐form market efficiency. The paper also shows that wrongly assuming constant expected returns may lead to incorrect inferences regarding market efficiency. (J.E.L.: G14, G12).