Testing commodity futures market efficiency under time-varying risk premiums and heteroscedastic prices |
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| Institution: | 1. Department of Decision Sciences, University of Sri Jayewardenepura, Nugegoda 10500, Sri Lanka;2. School of Economics and Finance, Victoria University of Wellington, Wellington 6140, New Zealand;3. Department of Accountancy and Finance, University of Otago, 60 Clyde Street, Dunedin 9016, New Zealand;1. Konkuk University, Department of Business Administration, 120 Neungdong-ro, Gwangjin-gu, Seoul, 05029, South Korea;2. Korea Housing & Urban Guarantee Corporation, 10F, BIFC, Munhyeongeumyungro 40, Nam-gu, Busan, 48400, South Korea;1. School of Business, East China University of Science and Technology, 130 Meilong Road, Shanghai 200237, China;2. Department of Finance, East China University of Science and Technology, Shanghai 200237, China;3. Department of Economics, University of Waterloo, 200 University Avenue West, Ontario, N2L 3G1, Canada;1. Tasmanian School of Business and Economics, University of Tasmania, Australia;2. Centre for Applied Macroeconomic Analysis, Australian National University, Australia;3. Department of Econometrics and Business Statistics, Monash University, Australia;1. University of Economics in Bratislava, Slovakia;2. Masaryk University, Faculty of Economics and Administration, Brno, Czech Republic |
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| 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. |
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| Keywords: | Commodity futures Market efficiency Futures risk premium State-space model Kalman filter G13 G14 G15 |
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