An explanation of unbiased expectations and efficient market hypothesis using Markov switching framework

Bhattacharya, Prasad S; Singh, Harminder

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An explanation of unbiased expectations and efficient market hypothesis using Markov switching framework

Bhattacharya, Prasad S; Singh, Harminder

Cite this item: Bhattacharya, P. S., & Singh, H. (2007, March 23). An explanation of unbiased expectations and efficient market hypothesis using Markov switching framework. University of Otago Department of Finance Seminar Series. Presented at the University of Otago, Finance department, Seminar.

Permanent link to OUR Archive version: http://hdl.handle.net/10523/1510

Date: 2007-03-23

Pages: 39

Conference: University of Otago, Finance department, Seminar, Commerce 5.37, University of Otago, Dunedin, Otago

Keywords: Efficient market hypothesis; Futures market; Cointegration; Error correction, Markov switching.

Research Type: Conference or Workshop Item (Seminar, Speech or Other Presentation)

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.

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