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Semi-Strong Market Efficiency
Semi-Strong Market Efficiency is a concept in finance that suggests that all publicly available information is quickly and accurately reflected in stock prices. In a semi-strong efficient market, it is believed that stock prices adjust rapidly to new information, making it difficult for investors to consistently outperform the market by using publicly available information. This concept is an important consideration for investors and financial analysts when making investment decisions.
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12 Key excerpts on "Semi-Strong Market Efficiency"
- Guray Kucukkocaoglu, Soner Gokten, Guray Kucukkocaoglu, Soner Gokten(Authors)
- 2018(Publication Date)
- IntechOpen(Publisher)
Semi-strong and weak forms of market efficiency can be related to each other as the weak form includes past and the semi-strong form includes both past and the public information. It can be deduced that, if one market is found to be efficient in the semi-strong form, then it also must be efficient in the weak form [ 13 ]. 2.2.3. Strong form of market efficiency This can be said to be as the strictest version of market efficiency because it not only contains the past and public information but also involves private information. Private information in studies can also be referred to as the inside or insider information. According to the EMH, the strong form of market efficiency can be defined as a market where the prices of financial assets reflect all of the available public and private information. In other words, stock prices in this market reflect all information that exists [23]. Financial Management from an Emerging Market Perspective 52 If a market is efficient in the strong form, it leaves no room for investors or even insiders from generating profits using information that is not publicly known. For example, let us take the cosmetics company to analyse once more; imagine that its research and development depart -ment came up with a breakthrough and they know that this piece of information will cause the company shares to increase by a large amount in the near future. By the time one of the members of this R&D team goes out and buys few of the company’s stocks, if strong form of efficiency holds, this information would have already been reflected on the stock price. Hence, that person with insider information would not be able to use this for his/her benefit [ 11 , 13 ]. It is debateable whether the strong form of market efficiency even exists. The results are contradicting, and research points out that evidence regarding the strong form is incon -sistent.
eBook - PDF- Shiguang Ma(Author)
- 2017(Publication Date)
- Routledge(Publisher)
Figure 3.2 The classifications of market efficiency in EMH From the trace of market efficient curve ME, it can be seen that a market is a weak form efficient market only when all historical information is available in the market. When all historical and current public information is available in the market, the efficiency of the market crosses into the second level, semi-strong form efficiency. The third level, i.e., the strong form efficient market occurs when all the information such as historical, current public and private information, are available The Theoretical and Empirical Perspectives of Efficient Stock Market 49 in the market. Conversely, if a market is not weak form efficient, it should be neither semi-strong form nor strong form efficient, due to the relevant set of information not being fully available in the market. Moreover, if a market is not a semi-strong form efficient, it should not be strong form efficient, as only the historical information is fully available in the market. Weak form efficient market hypothesis The weak form efficient market hypothesis asserts that the current prices fully reflect the information contained in the historical sequence of prices. Any knowledge from such information has already been included in current market prices, and is known by every participant. Thus, any participant of the market cannot predict future price changes by analysing past price patterns. Any effort to devise a trading strategy based on the information of past prices to yield abnormally high profit will be useless. Under the hypothesis of weak form efficiency, so called technical analysis, which is based on lines and charts drawn from data on past prices, would be unsuccessful in generating abnormal returns. Samuelson (1965) argued rigorously that if information flows are unimpeded and there are no transaction costs in a speculative market, then today’s price change reflects only today’s news and is independent of yesterday’s price change.
- S. Motamen-Samadian(Author)
- 2006(Publication Date)
- Palgrave Macmillan(Publisher)
Strong-form EMH states that a market is extremely efficient when all sorts of information are mirrored in stock prices. In this case, both widely available and confidential information are taken into consideration (set of information III ). The above definitions assume that fluctuations in prices of finan- cial assets are random because prices always reflect a given set of information. In other words, prices are always informationally effi- cient. If the market is informationally efficient in the weak form, then technical analysis based on charts of past quoted prices is not beneficial. Strictly speaking, it is not possible to use technical analy- sis based on price charts to create an investment strategy that can generate abnormal gains. If the semi-strong form of EMH holds, then none of the analyses that use the widely available information can produce more prof- itable rates of return than the market averages. Based on this hypoth- esis, fundamental analysis has no use in practice. Finally, if the market shows the strong form of EMH, then any efforts to gather information to generate abnormal profit is pointless. Market traders who have access to confidential information will not achieve any advantage over the others as the prices of financial instruments have already included all such information. Bearing in mind the above assumptions, the set of information determining weak-form EMH is included in the set of information determining semi-strong form EMH, and those in turn are included in the set of information determining strong-form EMH. In other words: Thus, strong-form efficiency encompasses the condition for semi- strong form efficiency, and that in turn encompasses the condition I II III Robert ´ Slepaczuk 93 for weak-form efficiency. The above relations have a significant implication for the results of this study, which tries to verify the application of weak-form EMH in the Warsaw Stock market.
- Peter Joakim Westerholm(Author)
- 2018(Publication Date)
- WSPC(Publisher)
I have personally tried to invest money, my client’s and my own, in every single anomaly and predictive result that academics have dreamed up. That includes the strategy of DeBondt and Thaler (that is, sell short individual stocks immediately after one-day increases of more than 5%), the reverse of DeBondt and Thaler which is Jegadeesh and Titman (buy individual stocks after they have decreased by 5%), etc. I have attempted to exploit the so-called year-end anomalies and a whole variety of strategies supposedly documented by academic research. And I have yet to make a nickel on any of these supposed market inefficiencies.•Clearly, technical analysis has its share of critics. Warren Buffet was quoted saying, “I realized technical analysis didn’t work when I turned the charts upside down and didn’t get a different answer.”•Most apparent incidences of mispricing seem eliminated by transactions costs. The primary exceptions to weak form market efficiency seem to be the IPO effect, probably the January effect, perhaps the small firm effect, and perhaps the P/E effect.•There is little agreement as to why these effects persist or even if the latter two do exist, they are anomalies.Semi-Strong Form Efficiency•Semi-strong form efficiency tests are concerned with whether security prices reflect all publicly available information.•For example, how much time is required for a given type of information to be reflected in security prices? What types of publicly available information might an investor use to generate higher than normal returns?•The vast majority of studies of semi-strong form market efficiency suggest that the tested publicly available information and announcements cannot be used by the typical investor to secure significantly higher than normal returns.Early Tests•Cox [1930] found no evidence that professional stock analysts could outperform the market.•Cowles [1933] performed several tests of what was later to be known as the efficient market hypothesis (EMH). He examined the forecasting abilities of 45 professional securities analysis agencies, comparing the returns that might have been generated by professionals’ recommendations to actual returns on the market over the same period.
eBook - ePub- Christian Szylar(Author)
- 2013(Publication Date)
- Wiley(Publisher)
In its strongest form, the EMH says a market is efficient if all information relevant to the value of a share, whether or not generally available to existing or potential investors, is quickly and accurately reflected in the market price. For example, if the current market price is lower than the value justified by some piece of privately held information, the holders of that information will exploit the pricing anomaly by buying the shares. They will continue doing so until this excess demand for the shares has driven the price up to the level supported by their private information. At this point they will have no incentive to continue buying, so they will withdraw from the market and the price will stabilize at this new equilibrium level. This is called the strong-form EMH. It is the most satisfying and compelling form of EMH in a theoretical sense, but it suffers from one big drawback in practice. It is difficult to confirm empirically, because the necessary research would be unlikely to win the cooperation of the relevant section of the financial community—insider dealers.2.2.2 Semi-Strong EMH
In a slightly less rigorous form, the EMH says a market is efficient if all relevant publicly available information is quickly reflected in the market price. This is called the semi-strong EMH. If the strong form is theoretically the most compelling, then the semi-strong form perhaps appeals most to our common sense and is closer to the real world. It says that the market will quickly digest the publication of relevant new information by moving the price to a new equilibrium level that reflects the change in supply and demand caused by the emergence of that information. What it may lack in intellectual rigor, the semi-strong EMH certainly gains in empirical strength, because it is less difficult to test than strong EMH.One problem with the semi-strong EMH lies with the identification of “relevant publicly available information”. Neat as the phrase might sound, the reality is less clear-cut, because information does not arrive with a convenient label saying which shares it does and does not affect.2.2.3 Weak-Form EMH
In its third and least rigorous form (known as the weak form), the EMH confines itself to just one subset of public information, namely historical information about the share price itself. The argument runs as follows. “New” information must by definition be unrelated to previous information, otherwise it would not be new. It follows from this that every movement in the share price in response to new information cannot be predicted from the last movement or price, and the development of the price assumes the characteristics of the random walk. In other words, the future price cannot be predicted from a study of historic prices.
eBook - PDF- Raghavendra Rau(Author)
- 2016(Publication Date)
- Cambridge University Press(Publisher)
The researchers tried very elaborate trading rules, not just simple trends. The uniform conclusion from these tests is that even if abnormal returns could be forecast (slightly) using past prices, trading costs would probably eat up any profits. A semi-strong efficient market incorporates all public information about a company into its prices. As an example, while we may have seen the movie, Titanic, depicting the sinking of the ship on April 15, 1912, most non-economists probably did not notice that the director, James Cameron, left out the vitally interesting news 4 that the ship’s owner, the International Mercantile Marine Company, spent $7.5 million to build the ship but only had had insurance for $5.5 million. Within two days, the market capitalization of IMM dropped by $2.5 million. In an era without email, helicopter news cameras, or Twitter, the market took less than two days to react to this information. $2 million was the difference in insurance value and the extra $0.5 million was perhaps due to expected lower cash flows due to lost 164 Market Efficiency reputation. The easiest way to understand how market efficiency works is to visualize returns using an event study graph in Figure 7.5 . The only reaction possible if the market is semi-strong efficient is the immediate reaction on the day the information becomes publicly available, the announcement day. It should be impossible to consistently earn abnormal returns by buying on the announcement day because all hypercompetitive traders are buying on that day driving the price up instantaneously. In contrast, suppose you aggregate 1,000 events of the same type, say all mergers, and find that the price takes time to react to information. It goes up slowly on good news – it under-reacts. Then you don’t have to be hypercompetitive. You can take your time buying and still guarantee that you can make money. Similarly, suppose you find that the market consistently over-reacts and then corrects itself.
eBook - PDFAfter Enron
Improving Corporate Law and Modernising Securities Regulation in Europe and the US
- John Armour, Joseph A McCahery, John Armour, Joseph A McCahery(Authors)
- 2006(Publication Date)
- Hart Publishing(Publisher)
The more quickly that prices re-equilibrated to reflect new information, the more closely they behave ‘as if’ they were set by the theorist’s ideal of a market populated exclusively by fully-informed traders. Thus market efficiency, as we saw it, concerned how rapidly prices responded to information, rather than whether they responded ‘correctly’ according to the predictions of a particular asset pricing model such as CAPM. 10 By the early 1980s, a large body of empirical work demonstrated that price responded extremely rapidly to most public and even ‘semi-public’ information—too rapidly to permit arbitrage profits on most of this information. By and large, then, the public equities market appeared to be semi-strong form efficient, meaning that relative efficiency was high for public information. But how was this possible, given that most traders were likely to be uninformed about the content of much of this information? We addressed this question on two levels. On the level of the capital markets, MOME proposed that four mechanisms work to incorporate information in market prices with progressively decreasing relative efficiency. First, market prices immediately reflect information that all traders know, simply because this information necessarily informs all trades, just as perfect markets theorists assumed (‘universally-informed trading’). Secondly, information that is less widely known but nonetheless public, is incorporated into share prices almost as rapidly as information known to everyone through the trading of savvy pro-fessionals (‘professionally-informed trading’). Thirdly, inside information The Mechanisms Of Market Efficiency Twenty Years Later 35 10 Put another way, our view was that prices responded ‘correctly’ to information to the extent that they responded rapidly.
No longer available |Learn moreInvestment Valuation
Tools and Techniques for Determining the Value of Any Asset
- Aswath Damodaran(Author)
- 2012(Publication Date)
- Wiley(Publisher)
Definitions of market efficiency are also linked up with assumptions about what information is available to investors and reflected in the price. For instance, a strict definition of market efficiency that assumes that all information, public as well as private, is reflected in market prices would imply that even investors with precise inside information will be unable to beat the market. One of the earliest classifications of levels of market efficiency was provided by Fama (1971), who argued that markets could be efficient at three levels, based on what information was reflected in prices. Under weak form efficiency, the current price reflects the information contained in all past prices, suggesting that charts and technical analyses that use past prices alone would not be useful in finding undervalued stocks. Under semi-strong form efficiency, the current price reflects the information contained not only in past prices but all public information (including financial statements and news reports) and no approach that is predicated on using and massaging this information would be useful in finding undervalued stocks. Under strong form efficiency, the current price reflects all information, public as well as private, and no investors will be able to find undervalued stocks consistently.IMPLICATIONS OF MARKET EFFICIENCYAn immediate and direct implication of an efficient market is that no group of investors should be able to beat the market consistently using a common investment strategy. An efficient market would also carry negative implications for many investment strategies:- In an efficient market, equity research and valuation would be a costly task that would provide no benefits. The odds of finding an undervalued stock would always be 50–50, reflecting the randomness of pricing errors. At best, the benefits from information collection and equity research would cover the costs of doing the research.
- In an efficient market, a strategy of randomly diversifying across stocks or indexing to the market, carrying little or no information cost and minimal execution costs, would be superior to any other strategy that created larger information and execution costs. There would be no value added by active portfolio managers and investment strategists.
- Lukasz Snopek(Author)
- 2012(Publication Date)
- Wiley(Publisher)
1 Because the price is given efficiently by the market, any opportunity to generate excess returns will immediately be eliminated by the large number of market participants. Therefore, it is impossible for any investor to outperform the market in the long term.“Conversely, if information is not always correctly nor immediately reflected in prices, this means there are pockets of inefficiency that may be exploited as part of an active portfolio management strategy.”2There are three forms of market efficiency originally defined by Eugene Fama in 1970.6.1 Weak Form Market Efficiency“A market is weak form efficient if prices incorporate all past information .”3 All past information is reflected in the current price, making it impossible to predict future price movements based on past prices.Many studies conducted using technical analysis methods (filters, moving averages) have reached the conclusion that after factoring in transaction costs, it is not possible to beat the market with any consistency.Weak form efficiency also implies that the returns on securities are independent from one period to another, as information is immediately included in the price. However, many tests invalidate the hypothesis of serially independent returns.Empirical studies, in particular by Bondt and Thaler (1985), have demonstrated that investors “overreact”, tending to favour securities that are the subject of good news to the detriment of securities associated with bad news.Evidently, weak form efficiency does not enjoy unanimous support. 6.2 Semi-Strong Form Market Efficiency“A market is semi-strong form efficient if prices incorporate all past and public information . According to this definition, it is impossible to make any excess gains by trading on earnings, dividend or stock split announcements, etc., as this information can be used by anyone once it is made public.”4
eBook - ePub- R. Stafford Johnson(Author)
- 2014(Publication Date)
- Bloomberg Press(Publisher)
For example, investors/fundamentalists may be too bullish about an unexpected good earnings announcement, causing the market price to overshoot its equilibrium value. Upon further assessment, the market may correct by slowing purchases or selling, causing the price to move down. During this reassessment period, the volatility of the stock price may increase. Semi-strong-form tests of the EMH do not rule out the possibility that during the assessment period some investors may pay less than the new equilibrium price and thus earn abnormal returns, whereas others may pay more than the equilibrium price and therefore earn returns less than the equilibrium return. Instead, the semi-strong-form tests try to determine if there are enough fundamentalists to ensure that investors, on average, do not earn abnormal returns from trading from events and announcements. As a result, the null hypothesis for the semi-strong-form tests, H ss 0, is: H ss 0 : Investors, on average, cannot earn abnormal returns from trading strategies based on publicly available information. Strong-form tests of the EMH are tests of whether all information—public and private—is fully reflected in the security's price. These tests usually take two forms. One form tries to determine whether or not insiders can earn abnormal returns from their private information. That is, do the officers, managers, engineers, scientists, accountants, and others in the company, as well as those who by the nature of their business are close to the company, have private information that would allow them to earn abnormal returns? In the United States and many other countries, there are security laws that require that insiders list their trades with the SEC. The intent of the laws is to make publicly available trades that are based on privileged information. If these and other laws aimed at inside trading are effective, then a priori we would expect security prices to reflect inside information
eBook - PDF- B. Dowling(Author)
- 2005(Publication Date)
- Palgrave Macmillan(Publisher)
Weak EMH. It assumes that current asset prices reflect only all relevant asset market information. What precisely does this mean? Asset market inform- ation includes historical prices, market-positioning data, rates of return, volatility and so on. Basically, the Weak EMH definition implies that asset prices reflect all information that has already been generated within the mar- ketplace. The applied implication of this belief structure is that investors are able to generate excess return (“above normal” profit) by searching for private information that is not presently in the marketplace and acting upon this information by subsequently positioning for the ensuing excess return as the information percolates from the private to public arena. In other words, Weak EMH assumes that the speed of information dissemination is slow. Obviously this purview is more supportive of our biological-based evolution- ary approach toward information generation and dispersal than Strong EMH (which, as will be explained later, is more supportive of what we label as the traditionalist finance viewpoint). 3 Semi-Strong EMH. This is a sort of a “half-way house” between the Strong and Weak versions of EMH – a “compromise” so to speak. The Semi-Strong definition of EMH encapsulates the conditions of Weak EMH but adds a more onerous timing element (or “speed” condition) in the sense that it is assumed asset prices adjust rapidly to the release of all market sensitive information.
eBook - PDFEmerging Markets
Performance, Analysis and Innovation
- Greg N. Gregoriou(Author)
- 2009(Publication Date)
- CRC Press(Publisher)
21 2 C H A P T E R Are Emerging Stock Markets Less Efficient? A Survey of Empirical Literature Kian-Ping Lim and Robert D. Brooks CONTENTS 2.1 INTRODUCTION 22 2.2 HOW TO MEASURE THE DEGREE OF INFORMATIONAL EFFICIENCY? 23 2.2.1 Market Model R -Square Statistic 23 2.2.2 Private Information Trading Measure 24 2.2.3 Price Delay Measure 25 2.2.4 Autocorrelation-Based Measures 27 2.2.5 Rolling Test Statistics 27 22 Emerging Markets: Performance, Analysis and Innovation 2.3 ARE EMERGING STOCK MARKETS LESS EFFICIENT? 28 2.3.1 Morck et al. (2000) 28 2.3.2 Jin and Myers (2006) 29 2.3.3 Fernandes and Ferreira (2008a) 30 2.3.4 Fernandes and Ferreira (2008b) 31 2.3.5 Griffi n et al. (2007) 31 2.3.6 Lim and Brooks (2008) 32 2.3.7 World Bank FSDI Project 33 2.4 CONCLUSION 34 REFERENCES 36 2.1 INTRODUCTION Market effi ciency has been defined in many different ways, and the lit-erature has not come to terms with a standard definition. However, the definition given by Fama (1970) is the most widely used in the academic literature and quoted in most standard finance textbooks. Specifically, the effi cient markets hypothesis (EMH) defines a market as effi cient when security prices fully reflect all available information, implying that new information is quickly reflected in prices. So, after nearly four decades, what is the current state of the literature on EMH? Lo (2008) notes that even after thousands of published articles, there is still no consensus among economists on whether financial markets are effi cient. One of the reasons given by the author for this state of affairs is that the EMH is not a well-defined and empirically refutable hypothesis due to the existence of the joint hypothesis problem, i.e., market effi ciency is determined within the context of a particular asset pricing model.
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