can someone contrast the different forms of market efficiencies? I dont get the stuff written in the book and i always get the answer wrong regarding this. S2000magician sir, can you please post this on your site, it’d be really helpful. Thank you in advance.
weak form efficient-the price incorporates all the previous price and trend data in it(hence technical analysis doesnt work) semi strong form efficit-price incorporates previous price and trend data as well as all the publicly known info(hence fundamental analysis is useless,along with tech analysis) strong form efficient-kinda hard to define but price incorporates even info known to insiders so even insider trading cant give u superior risk adjusted returns
Here we go (with acknowledgement to meeee20’s good response, above):
Investors cannot earn long-term, above average, risk-adjusted returns:
- Weak form efficiency : using historical price and volume data. This means that technical analysis is useless; an investor cannot use technical indicators based on historical price patterns (support levels, resistance levels, pennants, head-and-shoulders, etc.) or historical volume data (put-call ratio, margin debt, etc.) to generate long-term, above average, risk-adjusted returns because the market has already seen all of those indicators and included their information into the current price.
- Semi-strong form efficiency : using publicly available data. This means that fundamental analysis is useless; an investor cannot use publicly available data (e.g., financial statement analysis, press releases, proxy statements, etc.) to generate long-term, above average, risk-adjusted returns because the market has already seen all of those data and included their information into the current price.
- Strong-form efficiency : using any data, public or private. This means that any analysis, based on any information (including insider information that is not known publicly) is useless; an investor cannot under any circumstances generate long-term, above average, risk-adjusted returns because the market has already incorporated all data into the current price.
Markets are generally weak form efficient (though there are some persistent anomalies that shouldn’t exist in weak form efficient markets). Most markets generally appear to be semi-strong form efficient (though there are some persistent anomalies that shouldn’t exise in semi-strong form efficient markets). Most markets are generally not strong form efficient.
thank you sir, it was helpful, hope i’ll crack the questions correctly now.
thank you for the short and precise info., all the best.