Question

Describe the results and conclusions around weak form efficiency based on the following types of studies:

a. Returns over short horizons.

b. Returns over long horizons.

Answer 1

The results and conclusions around weak form efficiency based on returns over short and long horizons can be described as below :

a) Returns over short horizons : One way of recognising trends in stock prices is by measuring the serial correlation of stock market returns. Serial correlation refers to the tendency for stock returns to be related to past returns. Positive serial correlation means that positive returns tend to follow positive returns. Negative serial correlation means that positive returns tend to be followed by negative returns. Instocks traded on NYSE, over short horizons small positive serial correlation is found. However, correlation coefficients tend to be very small. Some other studies conclude that while the performance of individual stocks is highly unpredictable, portfolios of the best-performing stocks in the recent past appear to outperform other stocks with enough reliability to offer profit opportunities.

b) Returns over long horizons : Although studies of short to intermediate-horizon returns have detected momentum in stock market prices, tests of long-horizon returns have found suggestions of pronounced negative long-term serial correlation in the performance of the aggregate market.