Question

Efficient Market Hypothesis.

Semi-strong: evidence for and against (anomalies etc.)

Answer 1

The efficient market hypothesis (EMH) deal with informational efficiency and strongly based on the idea that the stock market prices or returns are unpredictable and do not follows any regular pattern so it is impossible to “beat the market”. According to the EMH theory security prices immediately and fully reflect all available relevant information.

Implications of EMH theory may be pointed out as follows:

• In efficient market stock price is always at the “fair” level, a stock price change only when its fair value changes.
• The market is efficient if the reaction of market prices to new information is immediate and unbiased.
• Stock prices immediately react on the news.
• Stock price changes are unpredictable because no one knows tomorrow’s news.
• Stock prices follow random walk, if price of today goes up nobody can tell what would be the price of tomorrow.
• It is impossible for investors to consistently outperform in the market.

In semi-strong form all publicly available information are incorporated into current stock prices. Publicly available information includes past price information plus company’s annual reports (such as financial reports, balance sheet and profit and loss account), company's announcement, macro economic factors such as (inflation, unemployment etc) and others. Some information (to the extent anticipated in advance) is discounted even before the event is announced and some before the event took place. Such matters like earnings reports, bonus, and rights affect the market even in anticipation before the formal announcements. Semi-strong form implied that share prices adjust to publicly available new information very rapidly and in an unbiased fashion, such that no one should be able to outperform the market using something that "everybody else knows". This indicates that a company's financial statements are of no help in forecasting future price movements and securing high investment returns. Evidences of empirical studies (most of them are based on event-study methodology) broadly support this form of efficiency.

Implications of Semi-Strong form are as follow:

• Market prices incorporate all publicly available information.
• Publicly available information is easily reachable for everybody so no investor can use it to device the strategy which could outperform the market on a consistent basis.
• Share prices adjust to publicly available new information very rapidly and in an unbiased fashion, such that no excess returns can be earned by trading on that information.
• Neither technical analyst nor fundamental analyst will be able to help the investors to outperform in the market. However, the following factors can impede the market-efficiency in its strong form:
• Information may be relatively difficult and costly to obtain.
• Information may be asymmetrically distributed; some investors may have access to information but others may not have.
• It may be difficult to segregate the information from noise.
• It may be difficult to interpret and to understand the exact implication of information.