The Tests for Market Efficiency

In the 20th century, academic financial economists widely accepted efficient market hypotheses. Most people claim that equity markets and securities markets are efficient against new information on the market. When information on factors that affect the market is displayed, some people think that information spreads like a fire in the market and stock prices are adjusted without delay accordingly. This means that there is no basic analysis related to the analysis of company's financial information such as income, capital and there is no technical analysis related to the company's past performance analysis.

This article is in three parts. Section 2 is a review of market efficiency. Market efficiency, various forms of market efficiency, and a brief history of demonstration testing of market efficiency are stated. Further discussion of criticism of EMH and behavioral finance. Section 3 summarizes this task. Financial and economic experts are adopting the concept of market efficiency. Fama (1970) presented a comprehensive overview of the theory and evidence of market efficiency from theory to empirical research. He pointed out that most of the empirical research was done before the development of the theory.

The most convincing market efficiency test is a direct test of the ability of professional fund managers to surpass the market as a whole. Of course, if the market price is determined by an irrational investor, systematically deviates from a reasonable estimate of the company's present value and it is easy to find a predictable safety return or an abnormal price price pattern To directly test the expert's actual performance, they should be the most convincing evidence of market efficiency, often better than market rewards through strong incentives

Financial economists define different markets based on the level of efficiency based on the type of information reflected in the price. Fama (1965) provides an operational basis for testing market efficiency by distinguishing between three efficiency types, ie weak market efficiency, somewhat strong market efficiency, and strong market efficiency. The first form of market efficiency is a weak form of EMH. A market is considered to have a weak effect if the current price of the security instantaneously and fully reflects all the information of the past safe price history. Price fluctuations are virtually completely irrelevant to previous fluctuations. In other words, there is no predictable price model. Therefore, investors can not benefit from researching past stock price information charts. In addition, because of its low efficiency, the effectiveness of trading rules designed to produce returns above average is eliminated.