Research Articles Base: Testing Weak Form Efficiency

Testing Weak Form Efficiency

The Efficient Market Theory (EMH) in its weak form declares that all past information are included in the price (Samuels et al., 1999).[1] If the market is weak efficient there cannot be any opportunities to predict future price movements using past prices (Fama, 1991).[2] Nevertheless, there are techniques to work out price movements with patterns of past data such as technical analysis; and if these techniques provide opportunities to beat the market, it proves its inefficiency in weak form (Grabele, 2003).[3] However, Higgins (1992)[4] states technical analysis is of no use (Higgins, 1992).  In addition, Russel and Torbey (2003) suggest that the inconsistent performance of technical analysts have inconsistent performance so technical analysis is indeed useless in beating the market. The weak form applied to stock markets postulates that share prices fully reflect all available information (Fama, 1991),[5] therefore securities prices follow a martingale. This is a straightforward implication of the assumption that investors fully exploit all available relevant information in trading and therefore arbitrage away all predictable profit opportunities. The above argument abstracts from transaction costs in the presence of which some relevant information might be ignored and not included in the price. In this sense the EMH could be restated in terms of (un)predictability of excess (abnormal) returns (Groenewold, 1997).[6] Studies by Mills on the FTSE proved that it is possible to predict future prices using past data (Grabele, 2003).[7] So there is evidence that the FTSE is inefficient. Nevertheless most evidences indicate that the market is most of the time weak efficient (Samuels et al., 1999).[8] FTSE is a group of an independent company which creates and provides management of indices and associated data services. FTSE has no capital markets involvement. Within the UK financial system the equity market played a rather insignificant role as a source of capital. It is interesting to analyze a market that has characteristics of the developed ones. Weak form efficiency tests are applied to the ftse100 because all the data required is currently available. Using tests such as the runs test, variance ratio tests, AR and the market model it is concluded that the UK equity market is a weak form efficient. Similar research on capital markets in some other European economies shows that they do exhibit this property (Dezelan, 1999).[9] Capital market efficiency is usually studied in the countries with most developed capital markets, like USA and UK.     [1] Samuels et al. (1999) The Efficient Market Hypothesis. Financial Management & Decision Making, 187 – 208.   [2] Supra Fama (1991) [3] Supra Grabele [4] Higgins, R. (1992) The efficient market hypothesis and the random walk theory. Analysis for Financial Management. 3rd ed. New York: Irwin/McGraw-Hill.   [5] Supra Fama (1991) [6] Groenewold, N. (1997) Share market efficiency: tests using daily data for Australia and New Zealand. Applied Financial Economics, 7, 645-657.    [7] Supra Grabele [8] Supra Samuels, et al [9] Supra Dezelan Credit:ivythesis.typepad.com

Testing Weak Form Efficiency

The Efficient Market Theory (EMH) in its weak form declares that all past information are included in the price (Samuels et al., 1999). ...