Efficiency of the Silver Futures Market. An empirical study using daily data. 1987
This paper assesses whether the silver futures market was weak form efficient between 1980 – 1984 (i.e. could an investor beat the market by using the information contained in the futures price changes). The early 80’s is a time of particular interest as it covers some of the period of silver manipulation by the Hunt brothers.
Basic tests of weak form efficiency are in favour, but once more advanced models are used prices are shown to be dependant to a certain degree on previous prices (serial dependence). With is in mind the authors used mechanical trading rules to test whether the inefficiency was large enough to allow traders to beat the market after covering their transaction costs. Most of the trading rules were shown to be profitable during the period; giving returns that adjusted for risk outperformed the market. Out of sample tests, to see whether the trading rules would work in the periods after the inefficiency was found, also showed evidence of an ability to outperform the market.
Method: Markov Chain modelling, Runs tests, Technical trading rules
Data: Daily data 1980 – 1984 collected from the Wall Street Journal
Full Citation: Aggarwal, Raj, and P. S. Sundararaghavan. “Efficiency of the silver futures market: An empirical study using daily data.” Journal of banking & finance 11.1 (1987): 49-64.
Abstract: This paper investigates whether the silver futures market is efficient with respect to the information contained in the time series of daily price changes. An analysis of the serial correlation of returns on silver futures supports the hypothesis that successive price changes are independent. However, a series of first and second order Markov chain models built using the direction as well as the magnitude of price change, reveals some short-term dependence. This result regarding the non-independence of successive price changes is reinforced by an analysis of upward and downward cycles, and by the extraordinary profits generated by using mechanical filter rules. The conclusion of this study is that the silver futures market does not seem to be efficient even in the weak form and that astute traders and investors can make modest excess risk-adjusted returns by using appropriate trading strategies.