Get weak form emh

Weak form efficiency, also known as the random walk theory, states that future securities' prices are random and not influenced by past events. Advocates of weak form efficiency believe all current information is reflected in stock prices and past information has no relationship with current market prices.

Market efficiency is typically conducted as a test of the random walk hypothesis. The most commonly conducted test for the random walk is the variance ratio test of Lo and MacKinlay (1988). The variance ratio test is based on the property that the variance of increments of a random walk is linear in its data interval.

Weak-form EMH asserts that stock prices already reflect all information contained in the history of past prices. The semistrong-form hypothesis asserts that stock prices already reflect all publicly available information.

The weak form of the EMH implies that an investor cannot earn positive abnormal returns on average using technical analysis (market information), after adjusting for transaction costs and taxes.

The main empirical test methods for Weak-form efficiency market hypothesis can be divided into two categories: one is to test the randomness of stock prices; the other is to test the invalidity of technical analysis, which testing the predictability of earnings.

Weak form of EMH is tested using the Kolmogorov-Smirnov goodness of fit test, run test and autocorrelation test. The K-S test result concludes that in general the stock price movement does not follow random walk. The results of the runs test reveals that share prices of seven companies do not follow random walk.

The weak-form efficient market hypothesis contends that current prices reflect all available security-market information including the historical sequence of prices, price changes, and any volume information. The implication is that there should be no relationship between past price changes and future price changes.