NONINFORMATIVE AND INFORMATIVE TESTS OF EFFICIENCY IN 3 ENERGY FUTURES MARKETS

This article presents a critique of tests of market efficiency commonl y applied to energy futures markets. Most of this literature fails to deal adequately with the endogeneity, nonstationarity, and cointegrati on characteristics of spot and futures prices, resulting in tests that are not informative about market efficiency. Consistent with this lit erature, application of these noninformative tests to spot and futures prices fi om three energy markets is generally not supportive of mark et efficiency. The article also presents two alternative tests of effi ciency that properly deal with the stochastic features of these price series. Nonstationary data can be modeled with cointegration methods, allowing valid tests of the efficiency hypothesis. Alternatively, test ing the equivalence of the data generation processes of the spot and f utures pl:ices provides an informative approach to efficiency testing with stationary data that does not suffer from endogeneity problems. A pplication of these two tests is largely supportive of weak and semi-s trong Efficiency in three energy futures markets. (C) 1998 John Wiley & Sons, Inc.