Question

Present the various forms of the efficient market hypothesis. (ii). What are the implications for these forms for the various types of financial analysts (for instance, technical analysts, fundamental analysts, etc)

Answer 1

The various forms of the efficient market hypothesis are :

• Weak
• Semi- Strong
• Strong

Weak form EMH: It explains how the past information is the reason for pricing in securities. Therefore, the own past price information will not be enough to predict the prices in the near future. It even states that past price statistics are serially independent. The weak form of market efficiency is synonymous with the random walk model in real. So, the investors in weak EMH cannot make real-time returns if they go on believing in the historical prices of securities. Fama (1991) also considered that weak form as " Test for Return Predictability" which mainly includes works on forecasting returns with variables like dividend yields and interest rates but not about the returns which can be gained.

Semi- Strong form EMH: It explains that security prices adjust rapidly and change accordingly to the information that is available to the public at large. So, it basically means current price situations not only depend on the past or present information but it depends upon the combination of both and the updated knowledge in total. So, in real life, the prices become fluctuated under this form because the investors will not attain large profits due to paying extra attention to such pieces of information.

Strong form EMH: While semi-strong deals with only the information that is made available to public whereas this strong form deals with every piece of information. The extreme level of efficiency is represented in this form. It asserts that the change in security prices have only occurred depending upon the public and private information that is available at large. Strong form is tested on looking at that type of information through which any investor has gained an added advantage due to such activities.

For instance,

Technical analysts mainly study the history of share prices with having a main objective to track the future behavior of the shares in the market. Their main intention is to study the historical prices and to predict the future prices from such analysis. These analysts believe that history is going to be repeated that is the prices remain same as they were in the past. Though they have different approaches but their main idea would revolve around the past market statistics.

Fundamental analysts mainly relay on the fundamental figures, ratios, and calculation as well as trends. They tend to say that share prices regress towards the intrinsic values. They prefer to take real-world examples by considering the economic and financial variables and according to it, they predict the process and pricing theories. The intrinsic value is the true worth of assets of such organization depending upon the process for a longer-term. The temporary variations doesn't affect any prices.