Weak Form Efficiency

Posted in Finance, Accounting and Economics Terms, Total Reads: 323
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Definition: Weak Form Efficiency

It is one type of efficient market hypothesis (EMH). It implies that the market is efficient and hence reflects all market information. It claims that all the past stock prices of the company reflect today’s market price. Also, that the rates of return in the past have no effect on the return in the future. Hence, technical analysis cannot be used to predict the stock price. Fundamental analysis, that is using the financial statements to predict the stock price, can be used to analyse if a given stock is overvalued or undervalued. This information can in turn be used to earn profits in investing.


There are tests to check for independence of the returns. Example is an autocorrelation test where we check that returns are not related over time to a significant extent. One more example is that of a run test where we check that the stock price changes are independent of time.


It indirectly states that it is impossible to outperform the market in the short run as it is impossible to predict in the prices in the short run.

 

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