Weak form hypothesis tests and results.
First category involves statistical tests of independence and the second entails a
comparison of risk-return results for trading rules that make investment decisions based on
past market information.
1. Statistical tests of Independence:
i) Autocorrelation. Does the rate of return correlate with rate of return on day
t-1 etc.
Results insignificant over time. But stronger for portfolios with small market cap stocks.
ii) Runs Test. Given a series of +++’s or —–‘s
Results confirmed independence of stock price changes.
1. Tests of trading rules. Price patterns Infinite number of potential trading rules
makes it impossible to test all of them. Bias towards well traded stocks.
Filter rules: Mixed results, Small filters more profitable but then generate greater fees
resulting in losses.
Semi – Strong Form Hypothesis tests and results.
This can be divided into the following sets of studies.
1. Studies to predict future rates of return using available public information and can
involve either time-series analysis or returns or the cross-section distribution of
returns for individual stocks. (Changes in the aggregate dividend yield or the risk
premium spread on bonds, or stock splits ore mergers)
Return prediction studies.
2. Event Studies examine how fast stock prices adjust to specific significant economic
events. (Can one invest in a security after public announcement of a significant
event and get abnormal returns?)
(The use of variables such as PE, PEG, DY to predict future returns)
Adjustment for market effects. What would have happened to the market during this
