EquitiesPsychology

Efficient Market Hypotheses: Weak, Semi – Strong and Strong

Though the efficient market hypothesis as a whole theorizes that the market is generally efficient, the theory is offered in three different versions: weak, semi-strong and strong.

The basic efficient market hypothesis posits that the market cannot be beaten because it incorporates all important determinative information into current share prices. Therefore, stocks trade at the fairest value, meaning that they can’t be purchased undervalued or sold overvalued. The theory determines that the only opportunity investors have to gain higher returns on their investments is through purely speculative investments that pose substantial risk.

Weak Form
The three versions of the efficient market hypothesis are varying degrees of the same basic theory. The weak form suggests that today’s stock prices reflect all the data of past prices and that no form of technical analysis can be effectively utilized to aid investors in making trading decisions. Advocates for the weak form efficiency theory believe that if fundamental analysis is used, undervalued and overvalued stocks can be determined, and investors can research companies’ financial statements to increase their chances of making higher-than-market-average profits.

Semi – Strong Form
The semi-strong form efficiency theory follows the belief that because all information that is public is used in the calculation of a stock’s current price, investors cannot utilize either technical or fundamental analysis to gain higher returns in the market. Those who subscribe to this version of the theory believe that only information that is not readily available to the public can help investors boost their returns to a performance level above that of the general market.

Strong Form
The strong form version of the efficient market hypothesis states that all information – both the information available to the public and any information not publicly known – is completely accounted for in current stock prices, and there is no type of information that can give an investor an advantage on the market. Advocates for this degree of the theory suggest that investors cannot make returns on investments that exceed normal market returns, regardless of information retrieved or research conducted.

Anomalies
There are anomalies that the efficient market theory cannot explain and that may even flatly contradict the theory. For example, the price/earnings (P/E) ratio shows that firms trading at lower P/E multiples are often responsible for generating higher returns. The neglected firm effect suggests that companies that are not covered extensively by market analysts are sometimes priced incorrectly in relation to their true value and offer investors the opportunity to pick stocks with hidden potential. The January effect shows historical evidence that stock prices – especially smaller cap stocks – tend to experience an upsurge in January.

Though the efficient market hypothesis is an important pillar of modern financial theories and has a large backing, primarily in the academic community, it also has a large number of critics. The theory remains controversial and investors continue attempting to outperform market averages with their stock selections.

Jack B. Maverick can be contacted on this link: Jack Maverick

Jack B. Maverick is a self employed forex trader and author and former commodity futures broker and stock market analyst. He has written numerous articles on trading for a variety of publications. He has a BSc in Psychology from the The Stillpoint Center and has published a book available on Amazon called: A Cross of Hearts

Jack B. Maverick is a self employed forex trader and author and former commodity futures broker and stock market analyst. He has written numerous arti...

NVP

Legendary member
36,599 1,858
The market is always right .........if the price goes up next ...thats right ...if the price goes down next .....thats right

my challenge on all this is that of academia and its total irrelevance and impotence in real world challenges......sure lets have a few papers that earn the writer a phd (awarded by the other people who have Phds) ........but for gods sake dont try to apply the theories in real life or you will lose your shirt

and they will always give you a reason or excuse why their hypothesesis failed ..."in that situation"

ive worked with a lot of acabemics in many industries and (sadly) their input is generally about as much use as a fart in a spacesuit..........

sorry guys ......this stuff is not my bag

N
 

Trader333

Moderator
8,495 881
.........sorry guys ......this stuff is not my bag
It's not meant to be and more to do with what may useful to know as a trader that is currently accepted by many as to why things are as they are in any given market.
 

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