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Analysis for Efficient Stock Index Market

Received: 6 July 2015     Accepted: 10 July 2015     Published: 17 July 2015
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Abstract

According to efficient market hypothesis, all the available information about future spot prices is incorporated into KOSPI200 stock index future contract prices immediately. In this paper, we test the hypothesis by an econometric approach developed by Johansen (2001), etc. Using only past data, we can consider stock market as efficient. (Weak-form EMH) But, it should be noted that if using past index future contract data leads to conclusion that future market is not efficient, and then the news about spot market prices is not fully incorporated in the future market. These tests imply that unbiasedness hypothesis (constant is zero, and coefficient is one) is rejected in regression equation. Notwithstanding, the forecasting performance of the Distributed-lags model using future index was best among competing forecasting models. In summary, there is no significant evidence that stock index spot markets are inefficient. Through long-run equilibrium relationships (and short-run dynamics, error correction), almost all the information for spot index in the past has functioned as spot price discovery in Korea stock markets.

Published in Journal of Finance and Accounting (Volume 3, Issue 5)
DOI 10.11648/j.jfa.20150305.11
Page(s) 103-116
Creative Commons

This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.

Copyright

Copyright © The Author(s), 2015. Published by Science Publishing Group

Keywords

Efficient Market, Nonstationarity, Price Discovery, Conditional ECM, Cointegration

References
[1] Antoniou A. and P. Holmes (1996), "Futures Market Efficiency: The Unbiasedness Hypothesis and Variance-Bounds Tests: The Case of FTSE-100 Futures Contract", Bulletin of Economic Research, 48, 2: 0307-3378.
[2] Bae, Kwon and Park (2004), "Futures Trading, Spot Market Volatility, and Market Efficiency: The Case of Korean Index Futures Markets", Journal of Futures Markets, 24, 12: 1195-1228.
[3] Blanchard O. and S. Fischer(1989), Lectures on Macroeconomics, The MIT Press.
[4] Campbell J. and Mankiw, N.G.(1987), "Permanent and Transitory Components in Macroeconomic Fluctuations ", American Economic Review Proceedings.
[5] Campbell J.(1997), The Econometrics of Financial Markets, Princeton Univ. Press: Princeton NJ.
[6] Cogley T.(1990), "International Evidence on the Size of the Random Walk in Output ", Journal of Political Economy 98(3).
[7] Engle, R.F.(1982) “Autoregressive conditional heteroscedasticity with estimates of the variance of United Kingdom inflation”, Econometrica 50: 987–1007.
[8] Fama, E.F.(1970) “Efficient capital markets: a review of theory and empirical work” Journal of Finance 25: 383–417.
[9] Fama, E.F.(1991) Market Efficiency, Long-term Returns, and Behavioral Finance, Journal of Financial Economics 49: 283–306.
[10] Hill C, W. Griffiths and G. Lim(2008) Principles of Econometrics, 3rd Ed.Wiley.
[11] Levich (2001) “Empirical Studies of Exchange Rates: Price Behavior, Rate Determination and the Market Efficiency”, Handbook of International Economics, Elsevier Publisher.
[12] Lim K-P. and R. Brooks(2011) “The Evolution of Stock Market Efficiency Over Time: A Survey of The Empirical Literature”, Journal of Economic Surveys, Volume 25, Issue 1, February:69–10.
[13] Nelson C. and Plosser C.(1982), "Trends and Random Walks in Macroeconomic
[14] Time Series ", Journal of Monetary Economics 10.
[15] Pesaran H, Y. Shin and R. Smith(2001), "Bound Testing Approaches to the Analysis of Level Relationships ", Journal of Applied Econometrics 16: 289-326.
[16] Pesaran H, Y. Shin(2000), "Structural Analysis of Vector Error Correction Models with Exogenous I(1) Variable", Journal of Econometrics 97: 293-343.
[17] Pesaran H, and Y. Shin(1999), "An Autoregressive Distributed Lag Modelling Approach to Cointegration Analysis ", Econometrics and Economic Theory in the 20th Century:, Cambridge Univ. Press.
[18] Romer D.(2006) Advanced Macroeconomics, International Edition.
[19] Yen, G. and Lee, C.F.(2008) “Efficient market hypothesis (EMH): past, present and future”, Review of Pacific Basin Financial Markets and Policies 11: 305–329.
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    Byung Woo Kim. (2015). Analysis for Efficient Stock Index Market. Journal of Finance and Accounting, 3(5), 103-116. https://doi.org/10.11648/j.jfa.20150305.11

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    Byung Woo Kim. Analysis for Efficient Stock Index Market. J. Finance Account. 2015, 3(5), 103-116. doi: 10.11648/j.jfa.20150305.11

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    Byung Woo Kim. Analysis for Efficient Stock Index Market. J Finance Account. 2015;3(5):103-116. doi: 10.11648/j.jfa.20150305.11

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  • @article{10.11648/j.jfa.20150305.11,
      author = {Byung Woo Kim},
      title = {Analysis for Efficient Stock Index Market},
      journal = {Journal of Finance and Accounting},
      volume = {3},
      number = {5},
      pages = {103-116},
      doi = {10.11648/j.jfa.20150305.11},
      url = {https://doi.org/10.11648/j.jfa.20150305.11},
      eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.jfa.20150305.11},
      abstract = {According to efficient market hypothesis, all the available information about future spot prices is incorporated into KOSPI200 stock index future contract prices immediately. In this paper, we test the hypothesis by an econometric approach developed by Johansen (2001), etc. Using only past data, we can consider stock market as efficient. (Weak-form EMH) But, it should be noted that if using past index future contract data leads to conclusion that future market is not efficient, and then the news about spot market prices is not fully incorporated in the future market. These tests imply that unbiasedness hypothesis (constant is zero, and coefficient is one) is rejected in regression equation. Notwithstanding, the forecasting performance of the Distributed-lags model using future index was best among competing forecasting models. In summary, there is no significant evidence that stock index spot markets are inefficient. Through long-run equilibrium relationships (and short-run dynamics, error correction), almost all the information for spot index in the past has functioned as spot price discovery in Korea stock markets.},
     year = {2015}
    }
    

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  • TY  - JOUR
    T1  - Analysis for Efficient Stock Index Market
    AU  - Byung Woo Kim
    Y1  - 2015/07/17
    PY  - 2015
    N1  - https://doi.org/10.11648/j.jfa.20150305.11
    DO  - 10.11648/j.jfa.20150305.11
    T2  - Journal of Finance and Accounting
    JF  - Journal of Finance and Accounting
    JO  - Journal of Finance and Accounting
    SP  - 103
    EP  - 116
    PB  - Science Publishing Group
    SN  - 2330-7323
    UR  - https://doi.org/10.11648/j.jfa.20150305.11
    AB  - According to efficient market hypothesis, all the available information about future spot prices is incorporated into KOSPI200 stock index future contract prices immediately. In this paper, we test the hypothesis by an econometric approach developed by Johansen (2001), etc. Using only past data, we can consider stock market as efficient. (Weak-form EMH) But, it should be noted that if using past index future contract data leads to conclusion that future market is not efficient, and then the news about spot market prices is not fully incorporated in the future market. These tests imply that unbiasedness hypothesis (constant is zero, and coefficient is one) is rejected in regression equation. Notwithstanding, the forecasting performance of the Distributed-lags model using future index was best among competing forecasting models. In summary, there is no significant evidence that stock index spot markets are inefficient. Through long-run equilibrium relationships (and short-run dynamics, error correction), almost all the information for spot index in the past has functioned as spot price discovery in Korea stock markets.
    VL  - 3
    IS  - 5
    ER  - 

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Author Information
  • Division of Liberal Arts, Korea National University of Transportation(KNUT), ChungJu City, South Korea

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