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Mohamed El Hedi Arouri, Fredj Jawadi, and Prosper Mouak on efficiency of the aluminium market

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Mohamed El Hedi Arouri, Fredj Jawadi & Prosper MouakThe speculative efficiency of the aluminum market: A nonlinear investigationInternational Economics, Volumes 126–127, February–March 2011, Pages 73–89.

Same authors: Testing the efficiency of the aluminium market: evidence from London metal exchangeApplied Financial Economics, Volume 23, Issue 6, 2013, pages 483-493.

Abstract in International Economics:Edit

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 modelling 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 in Applied Financial Economics:Edit

This article studies the efficiency of the aluminium market based on contracts traded on the London Metal Exchange (LME) over the last 3 decades. We test for both short- and long-run efficiency using nonlinear cointegration and Error Correction Models (ECM). Our findings suggest the following points. First, futures aluminium prices are found to be cointegrated with spot prices, but they do not constitute unbiased predictors of future spot prices. Second, the hypothesis of risk neutrality is rejected, but there is no evidence in favour of a time-varying risk premia. Finally, using past futures price returns improves the modelling and forecast of future spot price returns and the short-run efficiency hypothesis is rejected by regime, in particular when the disequilibrium size between spot and futures prices is high. Our findings have important implications for producers, arbitrageurs, speculators as well as policymakers.

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