Lookup NU author(s): Dr Fabrizio Casalin
This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License (CC BY-NC-ND).
The literature has recently proposed a new type of tests for the Efficient Market Hypothesis based onPermanent-Transitory Component Models. We compare the power of these statistics with conventionaltests based on linear regressions. Simulation results suggest that the former dominate the latter for awide 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 bythe size distortions and reduced power which affect the statistics based on linear regressions.
Author(s): Casalin F
Publication type: Article
Publication status: Published
Journal: International Review of Financial Analysis
Print publication date: 01/10/2016
Online publication date: 03/08/2016
Acceptance date: 27/07/2016
Date deposited: 02/06/2016
ISSN (print): 1057-5219
ISSN (electronic): 1873-8079
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