Economics Homework Help

I’m working on a finance multi-part question and need a sample draft to help me learn.

For each part:

• Explain a weakness in the support for the position they have explained.
• Identify an anomaly that contradicts their position.

part 1

Semi strong-form market efficiency is a level that involves market data including all publicly known and available data. According to the study on semi strong form market efficiency by Weeraratne, semi strong form markets do not include investors being able to use fundamental analysis in order to achieve higher returns. But public information that is available are things like earnings, dividends, and stock split announcements, new product developments, financing difficultness, and accounting changes.

When the market can quickly incorporate those information’s pieces into stock prices, that’s when it shows semi-strong form efficiency. Studies that share this perspective are written by Z Nan and T Kaizoji in their article International Review of Financial Analysis. A second article that backs up this notion is written by JM Griffin in his article “Are Emerging Markets More Profitable? Implications for Comparing Weak and Semi-Strong Form Efficiency”. It’s interesting to note that a semi strong form market implies that investors cannot act on public information after its announcement and expect to earn above-average risk-adjusted, or abnormal, returns. It’s just not enough and the right insider information to allow an investor to beat the market, or average market return. If information lags allow an investor to beat the market between announcement and incidence, that doesn’t count toward being inside the definition of a semi strong form market.

The test for a semi strong market is to see if investors can use public information to make above average returns. If they cannot, then indeed the market is semi strong form and not strong form. An important component of this test would be investor’s speed of reaction when public announcements are made.

The implication of semistrong form market efficiency is that security prices have factored in publicly-available market and that price changes to new equilibrium levels are reflections of that information. It is considered the most practical of all EMH hypotheses but is unable to explain the context for material nonpublic information (MNPI). It concludes that neither fundamental nor technical analysis can be used to achieve superior gains and suggests that only MNPI would benefit investors seeking to earn above average returns on investments (Chen, 2021).

part 2

Semi-strong form efficiency contends that security prices have factored in publicly-available market and that price changes to new equilibrium levels are reflections of that information. It is considered the most practical of all EMH hypotheses but is unable to explain the context for material nonpublic information (MNPI). It concludes that neither fundamental nor technical analysis can be used to achieve superior gains and suggests that only MNPI would benefit investors seeking to earn above average returns on investments.

EMH states that at any given time and in a liquid market, security prices fully reflect all available information. This theory evolved from a 1960s PhD dissertation by U. S. economist Eugene Fama. The EMH exists in three forms: weak, semi-strong and strong, and it evaluates the influence of MNPI on market prices. EMH contends that since markets are efficient and current prices reflect all information, attempts to outperform the market are subject to chance not skill. The logic behind this is the Random Walk Theory, where all price changes reflect a random departure from previous prices. Because share prices instantly reflect all available information, then tomorrow’s prices are independent of today’s prices and will only reflect tomorrow’s news. Assuming news and price changes are unpredictable then novice and expert investor, holding a diversified portfolio, would obtain comparable returns regardless of their expertise.

The weak form of EMH assumes that the current stock prices reflect all available security market information. It contends that past price and volume data have no relationship to the direction or level of security prices. It concludes that excess returns cannot be achieved using technical analysis.

The strong form of EMH also assumes that current stock prices reflect all public and private information. It contends that non-market and inside information as well as market information are factored into security prices and that nobody has monopolistic access to relevant information. It assumes a perfect market and concludes that excess returns are impossible to achieve consistently.

Example of Semi-Strong Efficient Market Hypothesis: Suppose stock ABC is trading at $10, one day before it is scheduled to report earnings. A news report is published the evening before its earnings call that claims ABC’s business has suffered in the last quarter due to adverse government regulation. When trading opens the next day, ABC’s stock falls to $8, reflecting movement due to available public information. But the stock jumps to $11 after the call because the company reported positive results on the back of an effective cost-cutting strategy. The MNPI, in this case, is news of the cost-cutting strategy which, if available to investors, would have allowed them to profit handsomely.