Question

In: Finance

You found that changes in an index fund occur within weeks of specific macroeconomic announcements (i.e....

You found that changes in an index fund occur within weeks of specific macroeconomic announcements (i.e. good news are followed by a slow increase in the fund’s price, while bad news are followed by slow decreases in price).  Is this market efficient? What forms of market efficiency are violated?

Solutions

Expert Solution

According to Efficient-market hypothesis market is said to be efficient when it reflects the prices of securities after considering all the information prevailing in the market. The prices will be unaffected by revealing certain set of information as market already incorporates it. In this theory, it is impossible to earn return more than that what market offers.

In above question, prices are fluctuating after the information set is revealed and it increases/decreases slowly over a period of time. Therefore, it can be concluded that markets are not efficient.

There are three forms :

1) Weak - only historical prices and returns are considered information set

2) Semi-Strong - public information is considered under semi strong form

3) Strong - both public and private information is considered.

Since, macroeconomics factors are issued publically, therefore Semi-Strong form is violated.

If you have any doubt, ask me in the comment section please.


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