Validate the theory 71 tests of the efficient market

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: ect all information, both public and private Efficient market theory has been subject to close scrutiny in the academic finance literature, which has attempted to test and validate the theory. 7.1 Tests of the efficient market hypothesis 7.1.1 Weak form The weak form of market efficiency has been tested by constructing trading rules based on patterns in stock prices. A very direct test of the weak form of market efficient is to test whether a time series of stock returns has zero autocorrelation. A simple way to detect autocorrelation is to plot the return on a stock on day t against the return on day t+1 over a sufficiently long time period. The time series of returns will have zero autocorrelation if the scatter diagram shows no significant relationship between returns on two successive days. Download free ebooks at 50 Corporate Finance Market efficiency Example: - Consider the following scatter diagram of the return on the FTSE 100 index on London Stock Exchange for two successive days in the period from 2005-6. 2 Return on day t+1 1 0 -1 -2 -2 -1 0 1 2 Return...
View Full Document

This note was uploaded on 10/26/2012 for the course 19 19 taught by Professor - during the Spring '12 term at Sunway University College.

Ask a homework question - tutors are online