Question

Explain the weak form market hypothesis and list all of its characteristics

Answer 1

The weak form market hypothesis is also known as Weak Form Efficient Market Hypothesis.

Under this hypothesis, it is assumed that the stock price movement observed on stock market are random movement, thereby implying that there is no inter dependencies between the current stock price at time t and stock price at time t-1

As the result of this, one can not forecast the future price based on historical analysis of the stock price data. The future price predicted using historical data would be of no use and hence, this implies that there can not be any historical pattern driven investment strategy that would ensure excess return.

Thus, this hypothesis intent to state that all available current information is reflected in the stock price and hence, past information does not explain current market prices.

Thus, if one were to rely on this hypothesis, one would tend to cherish an opinion that there is no need to hire any financial advisor or a portfolio manager.

The characteristics of weak form efficient market hypothesis are as follows:

1) Stock prices are random and holds no inter dependencies between prices in the past and present.

2) The future price can not be predicted on historical analysis of stock prices.

3) There is no utility of technical analysis of the stock price movement

4) One can not earn excess return in the long run

5) There can not be investment strategy based on historical price data that would guarantee stable income.

6) The current stock price reflect all available market information.