What Do Tests of Market Efficiency Show In The Presence of The Permanent-Transitory Confusion

To test for the efficiency of the Treasury bill market, Fama (1975) examined the residuals from a linear regression relating the rate of change in the value of money to a (previous) market forecast of its value. His maintained hypothesis is that if serial correlation of the regression residuals is found, market participants do not use all of the available information in an efficient manner; errors of forecast can be reduced by using the information contained in the persistent deviations of actual values from the forecast values implied by observable, market values.