strong-form test of efficient markets hypothesis
A few questions on Reading #57 in Study Session 13:
1. Anyone know where the terminology, “weak, semistrong, and strong” comes from?
2. So I get the basic concepts behind weak and semistrong, but on strong, re: the first description below:
How can the stock price reflect information from private sources? what would be an example of this? How can a stock price reflect inside information if by definition, inside information is info known only to insiders, and thus nobody is supposed to be trading on that information?
from Schweser study notes (book 4 page 146):
“Strong form of EMH states that stock prices fully reflect all information from public and private sources. Strong form includes all types of information: market, nomarket public and private (inside) information. This means that no group of investors has monopolistic access to information relevant to the formation of prices, and none should be able to consistently achieve abnormal returns.”
4. Re Strong-Form Tests of the EMH: from Schweser (book 4 page 147): “Academic tests of the strong form look at the legal use of private information.” Under what scenario could one be trading legally on inside information?
5. Re LOS 57.b: Schweser gives six examples of documented market anomalies and says that all six undercut the semi-strong form of EMH. Why the semi-strong? I think of the weak as referring more to technicals and the semi-strong as that plus fundamentals. For example, doesn’t the January effect have more to do with technicals than fundamentals (e.g. because in prior years, stock x and other stocks have tended to trade up, I will make an abnormal by buying in December and selling in January)
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