No excess returns can be earned by using investment strategies based on historical share prices or other financial data. Weak-form efficiency implies that Technical analysis will not be able to produce excess returns. To test for weak-form efficiency it is sufficient to use statistical investigations on time series data of prices. In a weak-form efficient market current share prices are the best, unbiased, estimate of the value of the security. The only factor that affects these prices is the introduction of previously unknown news. News is generally assumed to occur randomly, so share price changes must also therefore be random.
Notice that this looks stationary and quite random: a pattern that we previously fitted with the mean model. Hence, the forecasting model suggested by this plot is
…where alpha is the mean of the first difference , i.e., the average change one period to the next. If we rearrange this equation to put Y(t) by itself on the left, we get:
Credit:ivythesis.typepad.com
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