An Explanation of Efficient Market Hypothesis and Unbiasedness Using Markov Switching Framework
36 Pages Posted: 9 Nov 2006
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
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