TOPIC: You are required to test a market price for weak form efficiency
1. Select the market price
2. construct a schedule of tests
3. obtain the data
4. carry out the tests
5. write up the results
Data sources: EIU, oanda.com, yahoo finance, datastream
The write up: please follow this format!
Section 1. Introduction – What is being tested/reviewed? Why is the test/review important?
Section 2. Test design: How are you going to carry out your tests – be absolutely crystal clear in this section.
Section 3. Test: Results and further tests.
Section 4 Reflections on results and suggestions for further tests.
METHODS OF TESTING FOR WEAK FORM EFFICIENCY
Runs tests – MINITAB
A run is the number of changes in the same direction, so “+++–++++” has three runs.
The test counts the number of runs above and below the mean and compares the results with what one would expect from a random distribution. If the P score is close to
1 then there is a high probability that the actual runs are the same as the expected runs from a random process if the P score is below 0.05 then it is significantly
different and not random.
Variance ratio test
The ratio of the longer period variance with the shorter period variance multiplied by the number of shorter time periods in the longer period ie one would expect that
the monthly variance is the weekly variance x 4. You may look at days to years, months to years, weeks to months and so on. You may choose one long period or see if
the variance changes over time by dividing the period into smaller time periods and so on. And of course you may choose any time series of financial data, a currency,
a share price or market index – any market price that you would expect to conform to a random process.
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