Abstract
The literature has recently proposed a new type of tests for the Efficient Market Hypothesis based on Permanent-Transitory Component Models. We compare the power of these statistics with conventional tests based on linear regressions. Simulation results suggest that the former dominate the latter for a wide range of data generating processes. We propose an application to spot and forward interest rates. Empirical results show that the two types of tests can yield conflicting results which can be explained by the size distortions and reduced power which affect the statistics based on linear regressions.
Original language | English |
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Pages (from-to) | 142-153 |
Number of pages | 12 |
Journal | International Review of Financial Analysis |
Volume | 47 |
DOIs | |
Publication status | Published - 1 Oct 2016 |
Externally published | Yes |
Keywords
- Efficient Markets Hypothesis
- MC simulations
- Permanent-Transitory Component Models