What is Semi-Strong Form Efficiency
BREAKING DOWN Semi-Strong Form Efficiency
Semi-strong form efficiency contends that security prices have factored in available market and non-public market information (NMPI). It concludes that neither fundamental nor technical analysis can be used to achieve superior gains and suggests that only material nonpublic information (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.
Efficient Market Hypothesis Explained
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.
EMH is influential throughout financial research, but can fall short in application. For example, the 2008 Financial Crisis called into question many theoretical market approaches for their lack of practical perspective. If all EMH assumptions had held, then the housing bubble and subsequent crash would not have occurred. EMH fails to explain market anomalies, including speculative bubbles and excess volatility. As the housing bubble peaked, funds continued to pour into subprime mortgages. Contrary to rational expectations, investors acted irrationally in favor of potential arbitrage opportunities. An efficient market would have adjusted asset prices to rational levels