Weak Form Efficiency

Weak Form Efficiency

A version of the efficient markets theory on how markets work. It holds that the market efficiently deals with most information on a given security and reflects it in the price immediately. Specifically, weak form efficiency states that technical analysis is ineffective and that prices are on a random walk. Investors and academics disagree on how well the model works, but it is less controversial than the semi-strong form of the EMT and the strong form of the EMT.
References in periodicals archive ?
Additionally, Fama (1970), also classified the market efficiency into three different categories, each category is characterized in terms of different forms of information as; (i) weak form efficiency, which defines that equity prices fully reflect all available information about the historical trading; (ii) semi- strong form efficiency, which delineates that the publicly available information is fully reflected by the equity prices; and (iii) the strong form efficiency which proclaims that the equity prices fully reflect possible relevant information along with inside information of the company.
If a market is characterized by weak form efficiency, the returns on that market should follow a random walk process and consequently, should be non-stationary.
While they find evidence that all the 23 sectoral indices in their study exhibit behavior inconsistent with weak form efficiency, our analysis of long-range dependence suggests that the behavior of half of the sectoral indices diverges from what would be expected of series that follow a Brownian motion, but that that divergence in not true for all the sectors.
Daskalakis and Markellos (2008) examined the efficiency of the European market for carbon dioxide emission allowances and found that the behavior of the markets under consideration is not consistent with the weak form efficiency. Miclaus et al.
TESTING THE WEAK FORM EFFICIENCY ON THE ROMANIAN CAPITAL MARKET
The article "Malaysian finance sector weak-form efficiency: Heterogeneity, structural breaks, and cross-sectional dependence" attempts to test weak form efficiency of the banking system in Malaysia from a sample data that runs from 1994-2014.
In emerging markets Wong and Kwong (1984) used the runs test to examine the weak form efficiency in the Hong Kong stock market and concluded that it is inefficient.
Abraham, Seyyed and Alsakran (78) examined the weak form efficiency of the stock markets of Bahrain, Kuwait and Saudi Arabia by using both the variance ratio test and runs test: these tests showed that the random walk hypothesis is rejected when the index levels are used.
The studies such as Sharma and Kennedy (1977), Barua (1980, 1987), Sharma (1983), Ramachandran (1985), Gupta (1985), Srinivasan (1988), Vaidyanathan and Gali (1994) and Prusty (2007) supports the weak form efficiency of Indian capital market.
The results of nonlinear unit root tests indicated that only Bulgarian, Czech, Hungarian and Slovakian price series contain unit root, consistent with weak form efficiency.
Numerous studies (Fama, 1965; Alexander, 1961; Fama and Blume, 1966; Granger and Morgenstern, 1970) support the random walk theory in support of weak form efficiency. Semi-strong-form market efficiency states that no investor can earn an above economic return based on any publicly available information.
If these alphas persist over time and investors can use the information in the past returns of the funds to form strategies that deliver value added performance, this speaks to weak form efficiency.