Question

What are weak form, semi-strong form, and strong form efficiency? Does one form of efficiency imply another?

Answer 1

Hello there,

The forms of efficiency as mentioned in the problem are the types of Efficient Market Hypothesis ("EMH").

Let's understand the concept of Efficient Market Hypothesis.As per EMH a stock always trade at fair value on stock exchanges andf its impossible to undrvalue a stock or over value a stock and that the current price reflect all the information. EMH lays down that its impossible to beat the market.

There are three forms of efficiency as under:

1) Weak form efficiency

2) Semi-strong efficiency

3) Strong efficiency

Each of the forms are explained as under:

Weak form efficiency

Weak form efficiency states that the future price of a stock is insulated with its past prices/event/trend and that the past prices/event/trend/information of a stock would not affect the future price of that stock.The work form efficiency depicts that technical analysis for a script is inaccurate, because the past information/patternn is of no use.

Semi-strong efficiency

This concepts depictst that the current price of a stock is the resultant of all the publicily available information and that the past event/trend and technical analysis of a stock will tell the future of a stock. But semi-strong efficiency does not explain the impact of Material non-public information. Generally this the best and most practical form of hypothesis. Above average return can be claimed only in case material non-public information is available.

It provides that neither the fundamental analysis nor the technical analysis could provide an advantage to the investor and only the private information can be advantegeous.

Strong efficiency

The strong form of efficiency lays down a theory that all the private and public information are being reflected in the current market price and that even material non-public information has been factored in current price.

Strong form of efficiency assumes a paerfect market and there is no one who has any monopolistic access to the market.

Analysis

I believe that each form of efficiency are independent and unique and therefore no form implies to the other. Weak form ignore the technical and fundamental analysis where as semi-strong and strong efficiency considers that to be relfected in current price.

Semi-strong efficiency implies that only non-public information like financial results will have impact on future price, but strong efficiency says that even the future private information has been incorporated in the current market price and does not have any impact.

Weak form and Strong form implies the market to be perfect market whereas the semi strong efficiency reflects that market is monopolistic.