TOPIC: You are required to test a market price for weak form efficiency in financila economy
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
Notes Data sources:
EIU, oanda.com, yahoo finance, datastream The write up: please follow this format!
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 œ+++“++++ 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.
Nested if instructions You can use Excel to answer questions such as: if there are three rises in a row what is the probability that the share price or exchange rate will increase on the fourth day.
The instruction for this is: =IF(B4>B3,IF(B3>B2,IFB2>B1,B5,),),). But you can see that this enables you to choose any pattern albeit quite strictly defined. B% in this example Financial economic.