Title

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

Document Type

Journal Article

Publication Details

Wilson, E. J. & Marashdeh, H. A. (2007). Are Co-integrated Stock Prices Consistent with the Efficient Market Hypothesis?. The Economic Record, 83 (s1), s87-s93.

Abstract

This paper responds to the unsatisfactory argument that there is nocorrespondence between co-integration and the efficient markethypothesis. A law of one co-integrating vector of prices is proposed forthe exchange rate and domestic and overseas stock prices. Markets musttherefore be efficient in long-run equilibrium because no arbitrageopportunities exist. However, arbitrage activity via the disequilibriumerror correction allows above-average (risk-adjusted) returns to beearned in the short run. The elimination of these arbitrage opportunitiesmeans that stock market inefficiency in the short run ensures stock marketefficiency in the long run.

RIS ID

23215

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Link to publisher version (DOI)

http://dx.doi.org/10.1111/j.1475-4932.2007.00409.x