Testing the efficiency of the U.K. financial futures markets.

PhDThis thesis tests the efficiency of the U.K. financial futures market, using data over the period from September 1982 to March 1985. In examining the efficiency of the U.K. financial futures market a number of significant contributions are made to the existing literature. First, efficiency is examined on a data set that has not been rigorously examined. Second, more comprehensive tests of efficiency are proposed within this thesis than are reported elsewhere in the literature. chapter one provides a summary and review of the issues examined in the thesis. A detailed explanation of what constitutes a financial futures contract is given in chapter two, which covers the operational and institutional aspects of financial futures markets. A comprehensive survey of the literature is presented in chapters three and four. Chapter three looks in detail at the early theory and discusses the theoretical issues that are relevant in terms of financial futures. Chapter four examines the empirical literature and issues involved in testing efficiency. Five hypotheses are proposed that a financial futures market should possess. These hypotheses are then used to test efficiency on the U.K. financial futures market in chapters five to eight. First, arbitrage opportunities should not exist between the futures market and the underlying cash or the corresponding forward market. Second, it should not be possible to develop profitable pricing rules on the basis of past prices. Third, assuming risk neutrality, futures rates should be unbiased predictions of the futures rate at the maturity day of the contract. Fourth, news effects should explain any forecast errors that arise. Fifth, futures rates should incorporate all relevant information and hence exhibit variance. The rigorous examination of these different hypotheses finds that the U.K. financial futures market is efficien