Different Levels of Market Efficiency

Different Levels of Market Efficiency

This information includes earnings and dividends announcements, rights issues, technological breakthroughs, the resignation of directors, and other public disclosure either the firm or the financial press makes. Strong-form efficiency refers to a market that includes all the pertinent information to the stocks, including those that are privately held and not revealed in the form of public disclosure. With weak-form efficiency, the past price movements are incorporated in the market. In the form of technical analysis, an investor can determine the past performance of the stock in terms of price movements. However, since the past information is already incorporated in the prices, in weak-form efficiency predicting the future based on the past price of the market, and the investor cannot make abnormal returns from the stock by a basis of the historical prices alone. This is shown by the random walk in the stock market. With the semistrong-form efficiency, aside from the past movement of prices, all the available information is reflected in the price of the stocks. This is more common in fundamental analysis, where the basis of the stock valuations is the future profitability of the company. All the information was available for the public that can impact the future profitability of the company in the eyes of the investor drives the supply and demand for the stocks which determines the prices. The major implication of this is that the markets’ semi-strong efficiency would make it hard for an investor to make abnormal rates of returns because the prices have already absorbed the information. However, other incidents in the market can occur like stock market bubbles, and value investing which implies that the market is not fully efficient because there are other things beyond the publicly available information that influences the rationality of the market.

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