Testing Efficiency of the London Metal Exchange: New Evidence

Jaehwan Park,Byungkwon Lim

doi:10.3390/ijfs6010032

Abstract

This paper explores the market efficiency of the six base metals traded on the LME (London Metal Exchange) using daily data from January 2000 to June 2016. The hypothesis that futures prices 3M (3-month) are unbiased predictors of spot prices (cash) in the LME is rejected based on the false premise that the financialization of commodities has been growing. For the robustness check, monthly data is analyzed using ordinary least squares (OLS) and GARCH (1,1) models. We reject the null hypothesis for all metals except for zinc.

Highlights

After the publication of Fama’s seminal paper (Fama 1970), the efficient market hypothesis (EMH) has been tested extensively in various asset markets such as the equity, currency (Hansen and Hodrick 1980), and even commodity (Beck 1994) markets and their derivatives
The EMH is a joint hypothesis that tests whether market participants can generate excess returns, and uses their expectations based on the rational expectations hypothesis
One way to test the EMH is to determine whether the futures price Ft,n is the unbiased estimator of the future spot price St+n

Summary

Introduction

After the publication of Fama’s seminal paper (Fama 1970), the efficient market hypothesis (EMH) has been tested extensively in various asset markets such as the equity, currency (Hansen and Hodrick 1980), and even commodity (Beck 1994) markets and their derivatives. The commodity futures market is an instrument that producers/farmers and traders can use to reduce their price risk. The commodity futures market is comprised of spot and futures prices, so the prices in the two respective markets become the main measures of market efficiency (Gross 1988; Goss 1981). One way to test the EMH is to determine whether the futures price Ft,n is the unbiased estimator of the future spot price St+n. Note that the futures price at time t for a contract with maturity length n is an unbiased predictor of the spot price as long as the hypothesis prevails in the market at time t + n.

Objectives

Results

Conclusion