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This article studies the efficiency of the aluminium market based on contracts traded on the London Metal Exchange (LME) over the last 3 decades. We test for both short- and long-run efficiency using nonlinear cointegration and Error Correction Models (ECM). Our findings suggest the following points. First, futures aluminium prices are found to be cointegrated with spot prices, but they do not constitute unbiased predictors of future spot prices. Second, the hypothesis of risk neutrality is rejected, but there is no evidence in favour of a time-varying risk premia. Finally, using past futures price returns improves the modelling and forecast of future spot price returns and the short-run efficiency hypothesis is rejected by regime, in particular when the disequilibrium size between spot and futures prices is high. Our findings have important implications for producers, arbitrageurs, speculators as well as policymakers.
