2.4.1. Weak-Form Tests

Weak-form tests are tests used to examine whether investors can earn abnormal profits from the past data on asset prices. If successive price changes are independent and then unpredictable, it is impossible for investors to earn more than buy-and-hold. In the literature, there is evidence of random walk and independence in the successive price changes in support of weak-form market efficiency (e.g., Alexander 1961; Fama 1965a, 1965b; Fama and Blume 1966). However, Fama (1970) documented some evidence of departures from random walk with non-zero serial correlations in successive price changes on stocks (e.g., Cootner 1964; Neiderho ffer and Osborne 1966). Nevertheless, Fama (1970) recognized that rejection of random-walk model does not imply market ine fficiency. The independence assumption is too restrictive and not a necessary condition for EMH because market efficiency only requires the martingale process of asset returns (Samuelson 1965) with zero expected profits to the investors.
