Testing the Efficient Markets Theory on the Sydney Wool Futures Exchange

  • P. D. Praetz


The efficient markets theory is most commonly associated with Sharpe [16], Lintner [13, 14], Fama [5] and Fama and Miller [6]. In simple terms it states that a market in which prices fully reflect all available information is regarded as efficient. To make this proposition testable, it is necessary to specify a model of price formation in terms of expected returns, which depend on the risk vis-a-vis other securities and are conditional on an information set (S). This can be formalized by
where E is the expectation operator, pt is the price of a security at time t, rt+1 is the one-period return and pt and rt are random variables. The information set, S is fully utilized in equilibrium expected returns and therefore in the price.


Price Change Future Market Future Price Trading Rule Filter Test 
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Copyright information

© Palgrave Macmillan, a division of Macmillan Publishers Limited 1976

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  • P. D. Praetz

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