question about strong-form efficient

“the January effect is proof enough that markets are not strong-form efficient”

whether you agree or disagree with the statement and jusitfy your decision.

The January effect is an argument against weak-form efficiency (that prices quickly reflect market data), but certainly is not an argument against strong-form efficiency (that markets quickly reflect all data, public and private). The January effect has nothing to do with insider information.

I’m not sure I understand your viewpoint. Could you explain a bit more?

If the weak-form is violated, aren’t all three forms are violated? January effect may not have anything to do with insider information but since it violates prices are reflective of market data, which is a basic tenet of all three forms and hence would it not violate all three forms?

S2000 is correct:

This is a typical case of illicit minor syllogistic fallacy . The minor term is distributed as the conclusion but not in the process.

Argument : the January effect is true . This proves that a weak form efficient market does not exist .ergo a strong form efficient market cannot exist too.

An explanation of the illicit minor argument is :

All Dogs have tails

A cheshire cat has a tail too.

So the cheshire cat must be a dog.

The fallacy:

All strong form efficient markets are weak-form efficient as well.

So in order to prove that a strong form efficient market cannot exist , it is sufficient to prove that a weak form efficient market does not exist.

Forgive me.

^ What he said.

I disagree. Dogs and Cheshire cats are not in a subset-superset relationship like strong form and weak form.

There would be no January effect if a strong form, semi-strong form or weak form efficiency held.

In other words, if “–” denotes “implies”

strong form – weak form – technical analysis useless – no January effect.

Reverse this chain (if not A implies not B then B implies A)

Januarry effect – technical analysis works – no weak form – no strong form.

Agree. In a strong form efficient market, technical information such as stock price patterns could not be exploited for superior performance (and neither could fundamental factors or insider information). January effect is based on stock price patterns. So, if it can be exploited, then strong form efficiency does not hold.

To prove strong-form efficiency or lack of you would use a test that is structured to examine insider trades. It seems ridiculous to use a minor argument to prove or disprove the super

Not sure what you mean by minor argument and proving/disproving super. Could you answer more directly rather using cheshire cats and dogs or minor argument, super etc? EMH and January effect are complex as they are without introducing syllogism into it.

Strong-form efficiency means markets must satisfy all of the following 3 criteria:

  1. Arbitrageurs cannot consistently make money out of past price and volume data.

  2. Arbitrageurs cannot consistently make money out of publicly available information.

  3. Arbitrageurs cannot consistently make money out of private information including insider information.

January effect violates criterion 1 - hence market is not strong-form efficient.

This is a level 1 topic - in fact a similar question was asked in CFAI mock exam this year (2013 CFAI mock exam question 88 - incidentally there was an error in the answer causing a lot of confusion and then the institute corrected the answer and provided an errata).

If the market is not weak form efficient, then it is neither semi-strong efficient nor strong efficient because both of those encompass the weak form. If the market is not semi-strong efficient, it can still be weak-form efficient. If the market is not strong efficient, it still can be weak or semi-strong efficient.

To OP’s original question, it is possible to argue January effect is due to rational investors taking a risk (Fama 1995) and if risk-adjusted returns are considered (Fama 1995) market anomalies disappear as useful arbitrage opportunities. Also there’s some contention that you cannot make money after considering transaction costs even if the January effect or other market anomalies provide an opportunity. This is a hotly contended topic - so you can argue either way.

If it’s a multiple choice question in a CFA exam, I would go with agree - Jan effect violates strong form (provided none of the other options say you can argue both ways).

Actually, the more I think about this – something I should have done at the beginning – the more I agree that the January effect does, in fact, argue against strong-form EMH.

Strong-form EMH says that market prices quickly reflect all information, public and private. The January effect demonstrates that market prices don’t, in fact, quickly reflect all information, public and private.

Once again, I’m so glad I don’t have to take these exams any more.

If something violates weak form efficiency, then that also is sufficient to show that the market cannot be either semi-strong or strong form efficienct.

If semi-strong is violated then the market cannot be semi-strong or strong form efficient, however it may be weak form efficient.

this is an easy question = =

Stong form efficiency implies that no information can be exploited (past, public, private)

January effect = exploiting past data

therefore strong form doesn’t hold

Disagree, b/c January effect disproves semi-strong not strong form. Also I read the answer in the Scweser book like 4 months ago. COME GET SOME!!!

If a market isn’t semi-strong form efficient, it isn’t strong-form efficient.

Actually I just looked up the same question in both the 2013 and 2012 edition of the Schweser notes. Its in the EOC of reading 7 question 9. The 2012 says “Disagree”, the 2013 says “Agree”. Go figure, I’m blaming the folks at Schweser for this stupid question they created that they don’t even know the answer to.

My problem is the word “enough” in the question .

Indeed calendar anamolies such as the January effect prove all forms in efficient markets are invalid.

Since the strong-form encompasses all forms , it is sufficient ,if the January effect exists, to disprove that the strong-form exists. Its a trick question

The statement in quotes is asked such that it is implicitly suggesting that there is a January effect observed in the market and thus it proves that markets are not even weak form let alone strong form. Unless you think that the Jan effect happens because of neccesary tax and allocation of retirement funds, bonuses, etc. and that it occurs, people know it occurs it still works which in and of itself may not invalidate efficient markets.

The January effect has to be tradeable to disprove the weak form (and by extension the strong form, because the strong form by definition meets the criteria of weaker forms, plus additional criteria, janakisri’s jargo-babble notwithstanding). A pattern in prices does not disprove efficient markets if it is impossible to profit from it after transaction costs are considered. So it depends on whether the January effect is tradeable for a profit, which I think studies show it is.

Here’s an interesting data point. Virtually all of the growth in the S&P 500 over time comes from the overnight appreciation from close to open. If you could be in the market only during closing hours, you’d make a fortune with substantially less risk. However, you have to trade two times every day, buy at the close, sell at the open, and those transactions costs eat up all extra profits. Bummer, and that doesn’t provide enough evidence to challenge efficiency hypotheses, either.

The answer is “it depends”! :slight_smile: