The implications of market efficiency 1. The market is efficient if the reaction of market prices to new information should be instantaneous and unbiased. The information content of each successive classification is cumulatice. The weak form of the EMH requires that an analysis of past prices cannot be used as the basis for earning abnormal returns. Zero correlation is consistent with the random-walk hypothesis.
Runs tests examine the sign of price changes, or yields, during a specified sample period.
If price changes are independent, the expected number of runs can be calculated. The actual number of runs can be compared with the expected in order to determine the dependence in price changes. The test of semi-strong form of the EMH, event study, analyses the behaviour of a security's price around the time of a significant event such as the public announcement of the company's profit or dividend. Most studies use market model as a basis for estimating the normal rate of return on a security. It is usually not possible to determine when inside information became available to insiders.