An Explanation of Efficient Market Hypothesis and Unbiasedness Using Markov Switching Framework

36 Pages Posted: 9 Nov 2006

See all articles by Prasad S. Bhattacharya

Prasad S. Bhattacharya

Deakin University - Department of Economics; Research Associate, Centre for Applied Macroeconomic Analysis

Harminder Singh

Deakin University - School of Accounting, Economics and Finance

Date Written: July 2007

Abstract

This paper uses Indian stock futures data to explore efficient market hypothesis and unbiasedness. Having experienced voluminous transactions within a short time span after its establishment, the Indian stock futures market provides an unparalleled case for exploring these issues involving expectation and efficiency. Besides analyzing efficiency hypothesis and unbiasedness of stock futures market using cointegration and error correction model, the degree of efficiency is further investigated after explicitly modeling the underlying state of the market (expansion or contraction) through the first-order Markov switching set-up. The results based on Markov switching analysis show that relatively longer time horizon is more effective in eliminating arbitrage opportunities than the short run.

Keywords: Efficient market hypothesis, Futures market, Cointegration, Error correction, Markov switching

JEL Classification: G13, G14

Suggested Citation

Bhattacharya, Prasad S. and Singh, Harminder, An Explanation of Efficient Market Hypothesis and Unbiasedness Using Markov Switching Framework (July 2007). Available at SSRN: https://ssrn.com/abstract=943354 or http://dx.doi.org/10.2139/ssrn.943354

Prasad S. Bhattacharya

Deakin University - Department of Economics ( email )

221 Burwood Highway
Burwood
Melbourne, Victoria 3125
Australia
61392446645 (Phone)
61392446283 (Fax)

HOME PAGE: http://www.deakin.edu.au/~prasbhat

Research Associate, Centre for Applied Macroeconomic Analysis ( email )

ANU College of Business and Economics
Canberra, Australian Capital Territory 0200
Australia

Harminder Singh (Contact Author)

Deakin University - School of Accounting, Economics and Finance ( email )

221 Burwood Highway
Burwood, Victoria 3215
Australia

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