KINDLY HELP ME WITH GOOD EXAMPLES OF EACH OF THE THREE FORMS OF MARKET EFFICIENCY TO BACK
Question:
KINDLY HELP ME WITH GOOD EXAMPLES OF EACH OF THE THREE FORMS OF MARKET EFFICIENCY TO BACK THE INFORMATION BELOW
The three forms of market efficiency and an assessment of their plausibility
First of all, according to the weak form or formal weakness of market efficiency, all previous market prices and trading volumes have already been accounted for in the stock prices as of the present. This kind of market hypothesis therefore presupposes that market return rates should be independent and that past return rates have no bearing whatsoever on future rates.
Hence, utilising technical analysis, such as chart patterns, cannot consistently form abnormal returns. The idea of weak form efficiency is widely accepted and has undergone much research. The majority of technical analysts and chartists believe that past price patterns may predict future prices, however form inefficiency suggests that this is not the case.
One would concur that the concept of weak form efficiency is commonly acknowledged because the price of a security reflects all past market price and data, but it may not reflect current and future firm information. The weak form market hypothesis' assumption that the rates or prices of securities are independent serves as support for this claim. This indicates that the past prices of the asset cannot affect the current price (Baker, Bradley and Wurgler, 2018).
Secondly, according to the semi-strong or moderately broad form of market efficiency, all information that is publicly accessible is reflected in stock prices, making it impossible to consistently generate excess profits utilizing this knowledge. The weak-form form of market efficiency is therefore included in the semi-strong form of market efficiency, which states that stocks react swiftly to new information. It makes the erroneous assumption that an investor cannot profit from trading new knowledge in the market (Barberis, 2018).
Furthermore, since the market price already takes into account all pertinent information, it is impossible to estimate a stock's intrinsic worth by reviewing a company's public financial reports. Acting on unexpected releases cannot regularly produce tremendous returns because the market will quickly react to the fresh knowledge (Jegadeesh, 2019).
Nevertheless, much emphasis has been paid to the semi-strong form of market efficiency, which is supported by the vast majority of empirical evidence. Even so, other researchers contend that investigating private data, such as insider trading, may still produce results that are above average.
The strong or robust creation form of market efficiency, which combines the weak-form and semi-strong form of market efficiency, contends that stock prices already take into account all information, both public and private. Insider trading cannot, therefore, produce abnormal returns on a regular basis. The strongest form of market efficiency is the most disputed, with many academics disagreeing. Yet, there is some empirical evidence to support it, such as the observation that insider trading is not always profitable (Jegadeesh, 2019).
Introduction To Health Care Management
ISBN: 9781284081015
3rd Edition
Authors: Sharon B. Buchbinder, Nancy H. Shanks