An evaluation of the market efficiency of base metalsTools Barbukov, Aleksandar (2015) An evaluation of the market efficiency of base metals. [Dissertation (University of Nottingham only)]
AbstractThis work focuses on testing for the presence of market efficiency in base metals and whether the Financial crisis has affected the efficiency during the period of study. For the purposes of this study, 6 metals will be evaluated by looking at the relationship between spot and future prices based on contracts on each of the metals. To establish efficiency takes two major steps-testing for cointegration between the spot and future time series and testing the unbiasedness hypothesis that the futures prices are perfect predictors of the expected spot prices. Testing for cointegration is done through the Engle-Granger test and separately with the Johansen technique while the unbiasedness hypothesis will be tested through a Vector Error Correction Model. If the unbiasedness hypothesis doesn’t hold then tests based on the GARCH methodology will be employed to see if risk premia are included in the futures prices and whether this affects efficiency. The tests will be done for two samples- a pre and post-crisis one and results will be compared to establish whether the Financial crisis has affected efficiency in any way. The results suggest that none of the futures prices are perfect predictors of the expected spot price and that there are time-varying risk premia present which leads to the rejection of the market efficiency theory. Furthermore while in pre-crisis period cointegration is shown, there is no evidence for it in the post-crisis period which demonstrates the deteriorating effect of the crisis on efficiency.
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