Weak form level of efficiency-forms of efficiency, Financial Management

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Weak form level of efficiency

This level states that share prices fully reflect information in historic share price movement and patterns (past information/historic information). If this hypothesis is correct, then, it should be possible to predict future share price movement from historical patterns. E.g. If the company’s shares have increased steadily over the past few months to the current price of Shs.30, then this price will already fully reflect the information about the company’s growth and therefore the next change in share prices could either be upward, downward or constant with equal probability. It therefore follows that technical analysis or Chartism will not enable investors to make arbitrage profits. In markets that have achieved this level then security prices follow a trendles random walk.

Studies to test this level have been based on the principle that:

The share price changes are random
That there is no connection between share price movement and new share price changes. It is possible to prove statistically that there is no correlation between successive changes in price of shares and therefore trend in share price changes cannot be detected. This can be done by using serial correlation (or auto-correlation) test such as Durbin Watson Statistics.

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