Market Efficiency and Cointegration: A Post-demutualization Analysis of Canadian Life Insurance Stocks

This paper characterizes the (weak-form) efficiency of the Toronto Stock Exchange (TSX) with respect to the life insurance sector in a post-demutualization context, using a methodology called cointegration analysis. The major conclusion that can be drawn from this analysis is that the Canadian stock market appears to have been inefficient in pricing the securities of the three newly demutualized life insurance firms that became part of the S&P/TSX index of Canada’s financial sector. Indeed, it appears that it would have been possible to predict the future price behavior of these life insurance stocks by relying on past information following their demutualization.