We analyze the speculative efficiency of the six base metals traded at the London Metal Exchange (LME) for the post-Tin Crisis period from 1991-2008. Especially the influence of different futures contracts on the one side and different underlyings on the other side provides economic insights for market participants like hedgers and speculators. We focus on the 3-month and 15-month futures contracts for all six base metals and conduct single-contract test for every base metal applying an ARMA process. This system is expanded to the multi-contract case, modeling the forecast error as an ARMAX process, where we analyse the interaction of 3-months and a 15-month futures contracts for a single market and the interaction of all six base metals. We find a strong influence of the 3-month futures contract on the 15-month futures contracts. Market participants trading the 15-month contracts should therefore consider the information provided by the 3-month futures contracts.

In discussions and critiques on the validity of the Efficient Market Hypothesis, there are two important research focuses: statistical analyses showing that the basic assumption of statistical independence in price series is violated and empirical findings that show that significant market anomalies exist. In this paper, we combine both viewpoints by analyzing two important mathematical factor anomalies: low volatility and momentum. By applying an explicit trend model, we show that both anomalies require trending. Additionally, we show that the trend model exhibits lognormal trend characteristics. Furthermore, the model allows us to describe how low volatility uses implicitly asymmetric trend characteristics while momentum directly exploits trends. Using Mandelbrot’s model of fractional Brownian Motions, we can finally link statistical analyses (measuring the Hurst exponent and persistence in returns) to the empirically observed momentum factor. Experimentally, the Hurst exponent in itself allows for a momentum strategy, and can be utilized to significantly improve low volatility strategies. In contrast to Mandelbrot’s approach, we offer a non-stationary view that allows us to describe both investment strategies using the trend model.

Mandelbrot was one of the first who criticized the oversimplifications in finance modeling. In his view, markets have long-term memory, were fractal and thus much wilder than classical theory suggests. Recently, we were able to show that the scaling behaviour of trends, as defined by a specific trend decomposition using wavelets, are causing the momentum effect. In this work, we will show that this effect can be modeled by fractal trends. The so-called Mandelbrot Market-Model shows that markets are wilder compared with classical models. In conclusion, we derive what Mandelbrot always knew: There are no efficient markets.Keywords: efficient market hypothesis, momentum effect, fractal markets, trends Benoît Mandelbrot is considered by some as the father of quantitative finance as described by Dempster (2011). Among his extraordinary contributions in different disciplines (see Peitgen (2010) for a summary), he has contributed to the field of finance in many different areas. First, he was among the first who criticised normal distribution's usage to model asset returns as originally proposed by Bachelier (1900). Second, Mandelbrot (1963) observed that asset returns exhibit scaling properties, which may indicate that distributions of asset returns have infinite variance. Third, he was able to model "trending" and "mean reversion" effects by introducing, with van Ness in Mandelbrot (1968), the so-called fractional Brownian motion. Finally, Mandelbrot (1997) proposed a combined model using fractional Brownian motion, which is deformed in time by using multiplicative cascades. Although he was able to address fat tails, the non-stationarity in volatility and trending/mean-reversion effects in that model (a summary has been published in Quantitative Finance, refer to his series Mandelbrot (2001, I-IV), he also, in Mandelbrot (2001-III), sketched out a vision of "cartoons", i.e., a fractal trend compositions scheme (by using midpoint replacement techniques) constituting what he called a fractal market. From this viewing angle and particularly supported by his models, he concluded that there are no efficient markets, as assumed by his former student Eugene Fama in Fama (1970). Although many authors after Mandelbrot, and particularly Lo (1998), have shown that there is a long-term dependence of asset returns (violating the weak form of the efficient market hypothesis), there are counter arguments claiming that no one can exploit these dependencies structurally over long time horizons. Particularly, the size and value effect, e.g., reported in Fama (2012), are said to represent a higher insolvency or illiquidity risk. In that regard, the momentum effect, originally reported in Jegadeesh (1993) and also confirmed in Fama (2008) earlier, is of special importance, because it is reported by using simple management rules that leads to structural outperforming portfolios in terms of risk and return compared to a market index.Recently, in Berghorn (2015), we were able to show that the momentum effect is caused by trends in...

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Abstract: This paper analyses the validity of the weak-form market efficiency, using the random-walk hypothesis for the six industrial base metals -copper, aluminium, zinc, nickel, tin and lead -traded at the London Metal Exchange. I analyse the behaviour of daily and weekly prices of the daily rolling three-month futures contracts, as these contracts exhibit the highest level of trading activity. In contrast to other efficient-market studies, the efficiency of futures prices is not tested as an unbiased predictor of the spot prices but from the predictability of futures prices themselves. I focus on the post-Tin Terms of use: Documents in

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