TESTING MARKET EQUILIBRIUM - IS COINTEGRATION INFORMATIVE

Cointegration methods are increasingly used to test for market efficie ncy and integration. The economic rationale for these tests, however, is generally unclear. Using a simple spatial equilibrium model to simu late equilibrium price behavior, it is shown that prices in a well-int egrated, efficient market need not be cointegrated. Furthermore, the n umber of cointegrating relationships among prices is not a good indica tor of the degree to which a market is integrated.