To see whether the market is weak form of market efficient there are two statistical tests.
- Auto Correlation Test
- Run Test
1. Auto- correlation Test
If there is relation between the prices then we will say that in the stock market there is auto correlation and is weak form of efficient market like increase in P1 forms P2 and increase in P2 forms P3 and so on.
If in the market there is auto correlation than it is predictable and then we are able to earn return above average.
You buy and hold no time for analyzing the market.
There is time for analyzing the market and according to that you buy shares.
Autocorrelation is a characteristic of data in which the correlation between the values of the same variables is based on related objects. It violates the assumption of instance independence, which underlies most of the conventional models. It generally exists in those types of data-sets in which the data, instead of being randomly selected, is from the same source.
The presence of autocorrelation is generally unexpected by the researcher. It occurs mostly due to dependencies within the data. Its presence is a strong motivation for those researchers who are interested in relational learning and inference.
2. Run Test
For testing the market that which form of efficient market hypothesis exist run test is also used. In run test we identify the directions of stock market. There are three directions positive, negative and neutral. If there is consistency in these signs like 3 positive, 3 negative or 4 positive 4 negative then there is run in market and then market is weak form of market efficient.
A runs-test is a statistical procedure that examines whether a string of data is occurring randomly from a specific distribution. The runs test analyzes the occurrence of similar events that are separated by events that are different.
July 28, 2019