IDEAS home Printed from https://ideas.repec.org/a/bla/ecorec/v83y2007is1ps87-s93.html
   My bibliography  Save this article

Are Co‐integrated Stock Prices Consistent with the Efficient Market Hypothesis?

Author

Listed:
  • EDGAR J. WILSON
  • HAZEM A. MARASHDEH

Abstract

This paper responds to the unsatisfactory argument that there is no correspondence between co‐integration and the efficient market hypothesis. A law of one co‐integrating vector of prices is proposed for the exchange rate and domestic and overseas stock prices. Markets must therefore be efficient in long‐run equilibrium because no arbitrage opportunities exist. However, arbitrage activity via the disequilibrium error correction allows above‐average (risk‐adjusted) returns to be earned in the short run. The elimination of these arbitrage opportunities means that stock market inefficiency in the short run ensures stock market efficiency in the long run.

Suggested Citation

  • Edgar J. Wilson & Hazem A. Marashdeh, 2007. "Are Co‐integrated Stock Prices Consistent with the Efficient Market Hypothesis?," The Economic Record, The Economic Society of Australia, vol. 83(s1), pages 87-93, September.
    • Handle: RePEc:bla:ecorec:v:83:y:2007:i:s1:p:s87-s93
    DOI: 10.1111/j.1475-4932.2007.00409.x
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/j.1475-4932.2007.00409.x
    Download Restriction: no
    File URL: https://libkey.io/10.1111/j.1475-4932.2007.00409.x?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Sephton, Peter S. & Larsen, Hans K., 1991. "Tests of exchange market efficiency: fragile evidence from cointegration tests," Journal of International Money and Finance, Elsevier, vol. 10(4), pages 561-570, December.
    2. Hakkio, Craig S. & Rush, Mark, 1989. "Market efficiency and cointegration: an application to the sterling and deutschemark exchange markets," Journal of International Money and Finance, Elsevier, vol. 8(1), pages 75-88, March.
    3. Romer, Paul M, 1990. "Endogenous Technological Change," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 71-102, October.
    4. Engel, Charles, 1996. "A note on cointegration and international capital market efficiency," Journal of International Money and Finance, Elsevier, vol. 15(4), pages 657-660, August.
    5. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501.
    6. Burton G. Malkiel, 2003. "The Efficient Market Hypothesis and Its Critics," Journal of Economic Perspectives, American Economic Association, vol. 17(1), pages 59-82, Winter.
    7. Adler, Michael & Lehmann, Bruce, 1983. "Deviations from Purchasing Power Parity in the Long Run," Journal of Finance, American Finance Association, vol. 38(5), pages 1471-1487, December.
    8. Burton G. Malkiel, 2003. "The Efficient Market Hypothesis and Its Critics," Working Papers 111, Princeton University, Department of Economics, Center for Economic Policy Studies..
    9. Dwyer, Gerald Jr. & Wallace, Myles S., 1992. "Cointegration and market efficiency," Journal of International Money and Finance, Elsevier, vol. 11(4), pages 318-327, August.
    10. repec:pri:cepsud:91malkiel is not listed on IDEAS
    11. Baffes, John, 1994. "Does comovement among exchange rates imply market inefficiency?," Economics Letters, Elsevier, vol. 44(3), pages 273-280.
    12. Crowder, William J, 1994. "Foreign exchange market efficiency and common stochastic trends," Journal of International Money and Finance, Elsevier, vol. 13(5), pages 551-564, October.
    13. Crowder, William J., 1996. "A note on cointegration and international capital market efficiency: A reply," Journal of International Money and Finance, Elsevier, vol. 15(4), pages 661-664, August.
    14. Granger, Clive W J, 1986. "Developments in the Study of Cointegrated Economic Variables," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 48(3), pages 213-228, August.
    15. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-1580, November.
    16. Johansen, Søren & Juselius, Katarina, 1992. "Testing structural hypotheses in a multivariate cointegration analysis of the PPP and the UIP for UK," Journal of Econometrics, Elsevier, vol. 53(1-3), pages 211-244.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Wilson, E. J. & Jayanthakumaran, K. & Verma, R., 2012. "Demographics, Labor Mobility, and Productivity," ADBI Working Papers 387, Asian Development Bank Institute.
    2. Adam Karp & Gary Van Vuuren, 2019. "Investment Implications Of The Fractal Market Hypothesis," Annals of Financial Economics (AFE), World Scientific Publishing Co. Pte. Ltd., vol. 14(01), pages 1-27, March.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Kühl, Michael, 2007. "Cointegration in the foreign exchange market and market efficiency since the introduction of the Euro: Evidence based on bivariate cointegration analyses," University of Göttingen Working Papers in Economics 68, University of Goettingen, Department of Economics.
    2. Kühl, Michael, 2010. "Bivariate cointegration of major exchange rates, cross-market efficiency and the introduction of the Euro," Journal of Economics and Business, Elsevier, vol. 62(1), pages 1-19, January.
    3. repec:got:cegedp:68 is not listed on IDEAS
    4. Caporale, G. M. & Pittis, N., 1998. "Cointegration and predictability of asset prices1," Journal of International Money and Finance, Elsevier, vol. 17(3), pages 441-453, June.
    5. Elyasiani, Elyas & Kocagil, Ahmet E., 2001. "Interdependence and dynamics in currency futures markets: A multivariate analysis of intraday data," Journal of Banking & Finance, Elsevier, vol. 25(6), pages 1161-1186, June.
    6. Montserrat Ferre & Stephen Hall, 2002. "Foreign exchange market efficiency and cointegration," Applied Financial Economics, Taylor & Francis Journals, vol. 12(2), pages 131-139.
    7. Aroskar, Raj & Sarkar, Salil K. & Swanson, Peggy E., 2004. "European foreign exchange market efficiency: Evidence based on crisis and noncrisis periods," International Review of Financial Analysis, Elsevier, vol. 13(3), pages 333-347.
    8. Macide Cicek, 2014. "A Cointegration Test for Turkish Foreign Exchange Market Efficiency," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 4(4), pages 451-471, April.
    9. Phengpis, Chanwit, 2006. "Market efficiency and cointegration of spot exchange rates during periods of economic turmoil: Another look at European and Asian currency crises," Journal of Economics and Business, Elsevier, vol. 58(4), pages 323-342.
    10. J Fedderke & Michelle Joao, 2001. "Arbitrage, Cointegration And Efficiency In Financial Markets In The Presence Of Financial Crises," South African Journal of Economics, Economic Society of South Africa, vol. 69(3), pages 366-384, September.
    11. Alan Speight & David McMillan, 2001. "Cointegration and predictability in prereform east European black-market exchange rates," Applied Economics Letters, Taylor & Francis Journals, vol. 8(12), pages 755-759.
    12. R.D. Rossiter, 2002. "Term structure of forward exchange premiums: evidence from the 1920s," Journal of Economic Studies, Emerald Group Publishing, vol. 29(1), pages 33-47, January.
    13. Bank for International Settlements & Hong Kong Institute for Monetary Research, 2008. "Regional financial integration in Asia: present and future," BIS Papers, Bank for International Settlements, number 42, October –.
    14. Yamani, Ehab, 2021. "Foreign exchange market efficiency and the global financial crisis: Fundamental versus technical information," The Quarterly Review of Economics and Finance, Elsevier, vol. 79(C), pages 74-89.
    15. Bank for International Settlements, 2008. "Integration of India's stock market with global and major regional markets," BIS Papers chapters, in: Bank for International Settlements (ed.), Regional financial integration in Asia: present and future, volume 42, pages 202-236, Bank for International Settlements.
    16. Hassapis, Christis & Kalyvitis, Sarantis & Pittis, Nikitas, 1999. "Cointegration and joint efficiency of international commodity markets," The Quarterly Review of Economics and Finance, Elsevier, vol. 39(2), pages 213-231.
    17. Bang Nam Jeon & Euiseong Lee, 2002. "Foreign exchange market efficiency, cointegration, and policy coordination," Applied Economics Letters, Taylor & Francis Journals, vol. 9(1), pages 61-68.
    18. Jeon, Bang Nam & Seo, Byeongseon, 2003. "The impact of the Asian financial crisis on foreign exchange market efficiency: The case of East Asian countries," Pacific-Basin Finance Journal, Elsevier, vol. 11(4), pages 509-525, September.
    19. Engel, Charles, 1996. "The forward discount anomaly and the risk premium: A survey of recent evidence," Journal of Empirical Finance, Elsevier, vol. 3(2), pages 123-192, June.
    20. Wu, Jyh-Lin & Chen, Show-Lin, 1998. "Foreign exchange market efficiency revisited," Journal of International Money and Finance, Elsevier, vol. 17(5), pages 831-838, October.
    21. Shyh-Wei Chen, 2010. "Testing the hypothesis of market efficiency in the Taiwan-US forward exchange market since 1990," Applied Economics, Taylor & Francis Journals, vol. 42(1), pages 121-132.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:ecorec:v:83:y:2007:i:s1:p:s87-s93. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://edirc.repec.org/data/esausea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.