A semi‐strong test of the efficiency of the aluminum and copper markets at the LME

Abstract

market is defined to be efficient if there exists no profitable trading strategy. This has to hold even if all currently available information about the market (excluding inside information) has been skillfully used. The question of whether or not a market satisfies this criterion is of considerable interest as participants can engage in efficient markets at less transaction costs as in markets which necessitate extensive information search.For a commodity which is traded on spot and on futures markets, the prices on the two respective markets become central to the question of market efficiency. In a futures market hedgers can secure a certain price for a commodity at a future delivery date. The futures price also conveys information about the cash price at the maturity of the futures contract in that it reflects the different cash price expectations of the market participants at the time of contracting. Such information will be particularly important for agents not fully hedged as well as for market participants planning for future production or use. This article will concentrate on information aspects of futures prices and will disregard the security trade aspect.In the futures market, prices are created via the balancing of supply and demand which themselves are contingent upon the information currently underlying the market process. This knowledge consists partly of past prices from the same market, so that the new prices become part of subsequent information sets. In this sense, trading on futures markets (as on markets in *This article reports research undertaken in a project on the effects of international raw material market regulation on growth and allocation in developing countries funded by the "Deutsche Forschungsgemeinschaft." The author wishes to thank Egbert Gerken and Rolf J. Langhammer for many helpful suggestions.

Testing Efficiency of the London Metal Exchange: New Evidence

“…Canarella and Pollard (1986), Gross (1988), andMacDonald andTaylor (1988) found that the LME was efficient, while Kenourgios and Samitas (2004) and Otto (2011) found opposing results. Goss (1985) tested the joint hypothesis of spot and futures prices on the LME from 1966 to 1984.…”

“…Any strategy, therefore, designed to enhance the long-term profitability of trading LME futures may not succeed as long as the market is efficient. Gross (1988) tested the semi-strong EMH for copper and aluminum from 1983 to 1984 using the mean square error criterion. He found that the semi-strong EMH could not be rejected for both base metals.…”

“…The commodity futures market is comprised of spot and futures prices, so the prices in the two respective markets become the main measures of market efficiency (Gross 1988;Goss 1981). A futures price reflects the expectation of market participants.…”

Does the London Metal Exchange Follow a Random Walk? Evidence from the Predictability of Futures Prices~!2009-11-18~!2010-04-21~!2010-06-10~!

“…They rejected the EMH for tin and zinc. Gross [11] examined unvaried LME prices on the mean square error criterion for the period 1983-1984 in order to test the semi-strong EMH for copper and aluminium futures. He provided evidence that the semi-strong EMH cannot be rejected for both base metals.…”

11 Commodity futures trading

“…Gross (1988) (Gross,19(8). Gross, however, takes issue with this conclusion on the basis that ne't1T information becoming available could cause the prices of several metals to move in the same direction, leading to correlation in the forecasting errors.…”