Weak Form of Market Efficiency

Weak form of market efficiency is when past information related to prices is fully reflected in the current market prices and hence it cannot be used to earn excess return.

Weak form of market efficiency is the weakest form of efficient market hypothesis (EMH). Semi-strong form of market efficiency and strong form of market efficiency are the two other forms of efficient market hypothesis.

Weak form of market efficiency implies that technical analysis cannot be used to predict future price movements. Technical analysis is the use of past price movements to predict future price fluctuations. However, in the weak form of market efficiency, fundamental analysis and non-public information can be used to earn excess return.

Analysts and economists believe that most of the markets are at least weak-form efficient.

Example

Prashant is a broker working at the Punjab Stock Exchange. He has developed a recent interest in investments and has no prior experience. He observed that the price of Mohali Sports Equipment drops on Monday and rises on Friday. On 7 January 2013, he purchased 100 shares of MSE's stock for 11 INR per share. He was quite saddened to see that the price was 10.5 INR per share on Friday, 11 January 2013.

The market seems to be weak-form efficient, because it is not letting Prashant earn excess return by just picking stocks based on some past price pattern.

Written by Obaidullah Jan