This essay illustrates efficient market hypothesis formulated by Eugene Fama in 1970 and the three types of market efficiency with their connection to the price predictability. In an efficient market information is readily available to the investors on the basis of which they try to predict the future value of securities so no one can have the capacity to out-profit someone else. It has been also discussed that how these forms of efficiencies actually hold in the financial market and how they affect the behaviour of financiers.
The weak form of the efficient market implies that rates of return on the market should be independent, past information of the stock prices cannot be used to anticipate future value. There are two types of statistical tests that can be used to determine the validity for this assumption, first is the autocorrelation tests according to which over a period of time earnings are not suggestively correlated and second is the runs test which implies that fluctuations in stock price are self-determining over time. Secondly it was discussed that previous information about stocks could not predict future results so the instructions followed by the traders are invalid in this case. Filter rule could be an example of a trading test which illustrates that after transaction costs; a stockholder could not earn an unusual return.
The conclusion that can be deducted from the weak form of the efficient market hypothesis that it could be effective in formulating lucrative investment policies from past price or volume information for the one who is concerned in market depiction. Secondly for technical examination that is based on past price a theoretical groundwork and empirical support are not available.
In case of violation of weak form the semi strong and strong form are automatically violated because all the three forms build on each other. Each of the three forms would be violated if irregularities are effective in technical strategies trading rules and autocorrelation.