Weak Form Efficiency

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What is 'Weak Form Efficiency'

Weak form efficiency is one of the three different degrees of efficient market hypothesis (EMH); it claims that past price movements and volume data do not affect stock prices. As weak form efficiency is theoretical in nature, advocates assert that fundamental analysis can be used to identify undervalued and overvalued stocks. Therefore, keen investors looking for profitable companies can earn profits by researching financial statements.

Explaining 'Weak Form Efficiency'

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.

How Weak Form Efficiency Can Be Used

The main tenet of weak form efficiency is the randomness of stock prices makes it impossible to find price patterns and take advantage of price movements. Specifically, daily stock price movements are completely independent of each other, and it is assumed price momentum does not exist. Additionally, past earnings growth does not predict current or future earnings growth.

Efficient Market Hypothesis

The other two degrees of efficient market hypothesis are semi-strong form efficiency and strong form efficiency. Unlike weak form, both of these forms believe that past, present and future information affects stock price movements to varying degrees.

Weak form efficiency in Indian stock markets
www.clutejournals.com [PDF]
… DW test can not detect some forms of residual autocorrelations, eg if corr(ut, ut … Cheung, KC and Coutts, JA (2001) A note on weak form market efficiency in security prices … Market Efficiency, Long-Term Returns, and Behavioural Finance, Journal of Financial Economics, 49:3, 283 …

A non-parametric assessment of weak-form efficiency in the UAE financial markets
www.tandfonline.com [PDF]
… DW test can not detect some forms of residual autocorrelations, eg if corr(ut, ut … Cheung, KC and Coutts, JA (2001) A note on weak form market efficiency in security prices … Market Efficiency, Long-Term Returns, and Behavioural Finance, Journal of Financial Economics, 49:3, 283 …

Tests of weak‐form efficiency of the Dhaka stock exchange
onlinelibrary.wiley.com [PDF]
… DW test can not detect some forms of residual autocorrelations, eg if corr(ut, ut … Cheung, KC and Coutts, JA (2001) A note on weak form market efficiency in security prices … Market Efficiency, Long-Term Returns, and Behavioural Finance, Journal of Financial Economics, 49:3, 283 …

Nonlinear serial dependence and the weak-form efficiency of Asian emerging stock markets
www.sciencedirect.com [PDF]
… DW test can not detect some forms of residual autocorrelations, eg if corr(ut, ut … Cheung, KC and Coutts, JA (2001) A note on weak form market efficiency in security prices … Market Efficiency, Long-Term Returns, and Behavioural Finance, Journal of Financial Economics, 49:3, 283 …

Testing weak‐form efficiency in the Bahrain stock market
www.emerald.com [PDF]
… DW test can not detect some forms of residual autocorrelations, eg if corr(ut, ut … Cheung, KC and Coutts, JA (2001) A note on weak form market efficiency in security prices … Market Efficiency, Long-Term Returns, and Behavioural Finance, Journal of Financial Economics, 49:3, 283 …

Testing the weak-form efficiency of the Palestinian securities market
dspace.alquds.edu [PDF]
… DW test can not detect some forms of residual autocorrelations, eg if corr(ut, ut … Cheung, KC and Coutts, JA (2001) A note on weak form market efficiency in security prices … Market Efficiency, Long-Term Returns, and Behavioural Finance, Journal of Financial Economics, 49:3, 283 …

Testing the weak-form efficiency of the United Arab Emirates stock market
papers.ssrn.com [PDF]
… DW test can not detect some forms of residual autocorrelations, eg if corr(ut, ut … Cheung, KC and Coutts, JA (2001) A note on weak form market efficiency in security prices … Market Efficiency, Long-Term Returns, and Behavioural Finance, Journal of Financial Economics, 49:3, 283 …

The weak-form efficiency of the Taiwan share market
www.tandfonline.com [PDF]
… DW test can not detect some forms of residual autocorrelations, eg if corr(ut, ut … Cheung, KC and Coutts, JA (2001) A note on weak form market efficiency in security prices … Market Efficiency, Long-Term Returns, and Behavioural Finance, Journal of Financial Economics, 49:3, 283 …

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Q&A About Weak Form Efficiency

What is the efficient-market hypothesis?

The efficient-market hypothesis states that asset prices reflect all available information.

What does EMH imply about stock prices?

It implies that stock prices are unpredictable and follow a random walk.

How does weak form efficiency differ from strong form efficiency?

While both are forms of EMH, weak form states that past information has no relationship with current market prices. Stronger forms state that past information has some relationship with current market prices.

How does EMH relate to other theories of financial economics?

It relates closely with other theories of financial economics, in part due to its influence on research in this area since the 197s.

What is the main tenet of weak form efficiency?

The randomness of stock prices makes it impossible to find price patterns and take advantage of price movements. Specifically, daily stock price movements are completely independent of each other, and it is assumed price momentum does not exist. Additionally, past earnings growth does not predict current or future earnings growth.

Why do investors not beat the market consistently on a risk adjusted basis?

Because it is impossible to "beat the market" consistently on a risk adjusted basis.

What is weak form efficiency?

Weak form efficiency is one of the three different degrees of efficient market hypothesis (EMH); it claims that past price movements and volume data do not affect stock prices.

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