Weak Form Market Efficiency - Explained
What is Weak Form Market Efficiency?
Written by Jason Gordon
Updated at April 17th, 2022
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What is Weak Form Market Efficiency?
Weak form market efficiency, also known as he random walk theory is part of the efficient market hypothesis. The efficient market hypothesis concerns the extent to which outside information has an effect upon the market price of a security. There are three beliefs or views: Strong, Semi-strong, and Weak. The weak form efficiency view is that past movements in the price of the security and the data on the volume of trades do not affect the securities value. All current information available is already reflected in the price of the security. All past information is irrelevant. As such, investors should study company forward-looking information to determine when stocks are over-priced and under-priced. It is, pursuant to this theory, very difficult to outperform the market (particularly in the short run).
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How Does Weak Form Market Efficiency Work?
The concept of weak form market efficiency was proposed by Professor Burton G. Milkier in his book, A Random Walk Down Wall Street. It labeled technical analysis of securities (based upon past information) as largely inaccurate and pointed out the many flaws in fundamental stock analysis. Because the theory states that past information on price and volume trading of a security is irrelevant, it cannot be used to make decisions on future pricing. More specifically, every days trading of a particular security is independent of prior trading and reflects all current information about the security. Price may vary based upon speculation about future earnings, but past earnings is not a predictor of future earnings.