Are Co-integrated Stock Prices Consistent with the Efficient Market Hypothesis?
RIS ID
23215
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.
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.