Question

Explain clearly how you will proceed to test the semi strong form of market hypothesis using profit difference of certain stocks and market index?

if you could do an example on copybook, like draw column and put on some data and then explain what to do. Will put positive review if well explain.

Answer 1

1. Semi efficient form of market can be checked through reaction of stocks on the basis of the insider information. this form of market advocates that all the publicly available information have been discounted into the price while the privately available information has not been discounted in the price so there is always a scope for inside information to make excess money which can beat the rate of return of index.

To check whether market is semi efficient or not, one can look through post earning announcement drift which is a clear contradiction of semi efficient form of market when the announcement of of earnings are done if the share price have reacted to that earning before the the arrival of the news to a very little extent which reflects that management was already acting upon the numbers and those who are in touch with management are also acting upon the numbers to gain from it .it could be an example of semi strong form of efficiency.

Like in India before when Facebook bought into Reliance jio the share price before the announcement c jump 10% which shows that insider persons are aware about the information, much before the information hit the market.