Cocoa market efficiency: a cointegration approach

Examines the “efficient market” hypothesis for cocoa beans traded on the London Futures and Options Exchange. Futures market efficiency implies that futures prices accurately incorporate all currently known information. Consequently, current futures prices are unbiased forecasts of subsequent cash and/or futures prices and traders cannot earn abnormal returns. The recently developed cointegration theory is utilized to test efficiency in the London Cocoa Market. A problem in testing market efficiency is that the relevant economic data series may be non‐stationary. Under these circumstances, conventional statistical procedures for testing market efficiency are no longer appropriate. The use of a cointegration methodology properly accounts for the non‐stationary properties of futures and spot price series. The price data are monthly data from the London Futures and Options Exchange and they cover the period from 1985‐1991. The evidence presented here does not support the efficient market hypothesis.