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The weak form of the efficient market hypothesis and its application to the Vancouver listed mining stocks Buis, Richard

Abstract

The purpose of this study was to test the hypothesis that security price changes for the Listed Vancouver Mining Stocks conform to the weak form of the Efficient Market Hypothesis. Briefly stated this hypothesis asserts that current prices fully reflect the information implied by the historical sequence of prices. If such is the case it would not be possible for an investor to enhance his investment performance by studying previous successive price changes. In order to determine whether this hypothesis is applicable to the Listed Vancouver Mining Stocks a series of tests were performed on the monthly price data for the period, March 1963 to February 1973. The method of investigation consisted of a number of separate and distinct experiments. Initially the monthly price changes were serially correlated for various differencing intervals to determine the degree of dependency in the price changes. Following this procedure, trend analysis was performed to measure the number of runs or patterns in the price changes and to compare these results with what could be expected if the series was random. The individual stocks were also subjected to a trading rule, referred to as filtering, to see if a mechanical trading rule could out perform a buy and hold policy. Finally an analysis was performed to determine if security price changes were identically distributed and whether they were stationary over time. In all cases there appeared to be little dependence in price changes. Both the serial correlation and runs tests yielded results consistent with a random walk theory. Filter rules applied to the data generated results vastly inferior to the buy and hold portfolios, suggesting that once a move is initiated there is evidence to indicate that it does not necessarily persist. The distribution of price changes tended not to be stationary over time. Whether this implies security returns do not conform to some given probability distribution or whether the time period under study was unrepresentative will require further study. The general conclusion to be derived from this study is that price movements of the Vancouver Listed Mining Stocks conform to the weak form of the Efficient Market Hypothesis.

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