International Economics

<< N°126-127

  N°126-127  
Issue Q2-3 2011  
The speculative efficiency of the aluminum market: A nonlinear Investigation  
Mohamed El Hedi Arouri
Fredj Jawadi
Prosper Mouak
 
This paper studies the speculative efficiency of the aluminum contract traded in the London Metal Exchange over the last three decades. We investigate both short and long-run efficiency using linear and nonlinear cointegration approaches and Error Correction Models (ECM). Our findings point out the following points. First, futures aluminum prices are found to be cointegrated with spot prices and they do not constitute unbiased predictors of future spot prices. Second, the hypothesis of risk neutrality is rejected. Finally, the short-run efficiency hypothesis is rejected and using past futures price returns improves the modeling and forecast of future spot price. Our findings have important implications for producers, arbitrageurs, speculators as well as policymakers. As far as our knowledge allows to remember, this paper is the first attempt to test both linear and nonlinear efficiency for the aluminum market. Abstract

   
Speculative Efficiency ; Aluminum Market ; London Metal Exchange ; Keywords
C3 ; C5 ; G1 ; JEL classification
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