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IAI Actuarial Core Principles · Economic Modelling · Rational expectations theory and the efficient markets hypothesis

An analyst studies whether past price changes of Indian large-cap shares can be used to earn abnormal returns, by applying filter rules and examining serial correlation of daily returns. Which form of the efficient markets hypothesis is this evidence primarily testing?

The weak form of the efficient markets hypothesis is being tested. Filter rules and serial correlation use only past price data, so they check whether historical prices help predict future returns. Public-information tests relate to semi-strong form, and insider-information tests relate to strong form.

  1. AWeak formCorrect
  2. BSemi-strong form
  3. CStrong form
  4. DAllocative efficiency only
  5. The capital structure irrelevance proposition

Explanation

Tests that use only past price or return data, such as filter rules and serial correlation, examine whether historic prices contain exploitable information. That is the weak form. Semi-strong tests use public announcements and strong-form tests use private information.

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