The relative efficiency of commodity futures markets

The ability of futures markets to predict subsequent spot prices has been a controversial topic for a number of years. Empirical evidence to date is m ixed; for any given market, some studies find evidence of efficiency, other s of inefficiency In part, these apparently conflicting findings reflect di fferences in the time periods analyzed and the methods chosen for testing. A limitation of existing tests is the classification of markets as either e fficient or inefficient with no assessment of the degree to which efficienc y is present. This article presents tests for unbiasedness and efficiency a cross a range of commodity and financial futures markets, using a cointegra tion methodology, and develops a measure of relative efficiency. In general , the findings suggest that spot and futures prices are cointegrated with a slope coefficient that is close to unity, so that the postulated long-run relationship is accepted. However, there is evidence that the long-run rela tionship does not hold in the short run; specifically, changes in the spot price are explained by lagged differences in spot and futures prices as wel l as by the basis. This suggests that market inefficiencies exist in the se nse that past information can be used by agents to predict spot price movem ents. A measure of the relative degree of inefficiency (based on forecast e rror variances) is then used to compare the performance of different market s. (C) 1999 John Wiley & Sons, Inc.