A note on forecasting the CAC 40 and DAX stock index futures

Abstract

In this paper we extend the research on the predictability of stock and bond markets to futures markets. By using stock and bond market forecasting variables we build ex ante models of the MATIF CAC 40 and DFB DAX stock index futures contracts. Since it is possible to construct a practical trading rule from the out-of-sample forecasts from these models, we use these models as a valid test of the efficient market hypothesis. We find that while we can develop a profitable trading rule for the French contract, a similar profitable trading rule for the German contract cannot be developed. Our results appear to suggest that the stock index futures market in France appears to be weakly inefficient, while the German model may only represent spurious correlations between the forecasting variables and the DFB DAX contract.