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Unformatted text preview: olume of advancing stocks. If
TRIN > 1 over the past 5 days, then sell the stock.
4 Cheryl Mew FINS2624 – Portfolio Management Semester 1, 2011 Technical analysts do not believe in any form of market efficiency, as weak form, semi-strong from and strong
form all state that share prices should have already reflected historical price and volume data, and no-one can
earn abnormal returns using technical strategies based on this information.
While finding a profitable trading rule would violate all 3 forms of market efficiency, the finding of a trading
rule that is not profitable will only use to prove the weak form efficiency market hypothesis, as the rule is
based on past data only, not other public or private information. This means, if a market is not weak form
efficient, it is also not semi-strong and strong form efficient. On the other hand, if a market is not semi-strong
form efficient, the market can still be weak form efficient.
However, a trading rule was found by Chopen, Lakonishok and Ritter (1992), where they found that loser
portfolios contained the worst performing stocks, outperformed the winner portfolios in the last 5 years. This
anomaly provides evidence that was contrary to the weak form efficient market hypothesis. Proponents of
market efficiency argue that the success of this trading rule was not the result of an inefficient market, but
rather the irrational behavior of market participants who overreact to good and bad news. S TOCK RETURN PATTERNS
Another way of testing for weak form efficient hypothesis is to investigate the presence of any predictable
returns in stock. This is done by testing the stock or index returns for a serial correlation. The serial correlation
measures the correlation coefficient between a time series of returns and the same time series of returns
lagged for one or more periods. If daily returns are predictable, the consecutive daily returns will be
positively/negatively serially correlated. Majority of empirical findings have suggested that stock returns
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