Abstract
This paper uses Indian stock futures data to explore unbiased expectations and efficient market hypothesis. 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 market efficiency between cash and futures prices using cointegration and error correction frameworks, the efficiency hypothesis is also 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.