A test of the Incrementally Efficient Hypothesis for the London Gold Market (1985)
This paper offers one of the first examinations of whether the gold market is efficient. It tests for weak form efficiency, that is test whether freely available market information can be used to predict returns. It uses the US Dollar/DM exchange rate as a predictor variable for the gold returns. It applies the idea of incremental efficiency, that the price of any asset can be affected by others but if so price should change at the same time. If there were a lag it would be possible to use one price change to predict another and thereby beat the market.
It finds that the gold market is incrementally efficient with respect to the USD/DM rate.
Method: Sims Test and Hsiao Test of market efficiency
Data: 1970 – 1980 Daily Data: London gold spot market and US Dollar/DM spot rate
Full Citation: Ho, Yan-Ki. “A test of the incrementally efficient market hypothesis for the London gold market.” Economics Letters 19.1 (1985): 67-70.
Abstract: Using daily data from the London gold market from 1979 to 1980 both the Sims (1972) and the Hsiao (1981) tests do not indicate any unidirectional causality running from changes in US$/DM price to changes in gold price implying the gold market is incrementally efficient with respect to US$/DM price changes. This however raises doubt about the incremental efficiency of the foreign exchange market for US$/DM.