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The semi-strong form of the efficient market hypothesis asserts that all publicl

ID: 1200451 • Letter: T

Question

The semi-strong form of the efficient market hypothesis asserts that all publicly available information is rapidly and correctly reflected in securities prices. This implies that investors cannot expect to derive above-average profits from purchases made after information has become public because security prices already reflect the information’s full effects.

a. Identify and explain two examples of empirical evidence that tend to support the EMH implication stated above.

b. Identify and explain two examples of empirical evidence that tend to refute the EMH implication stated above.

c. Discuss reasons why an investor might choose not to index even if the markets were, in fact, semi-strong form efficient.

Explanation / Answer

a.

As per the efficient market hypothesis, a market would be efficient if the security prices of the market reflect all the relevant, complete and immediate information. Since, the market reflects all the information; therefore investors cannot expect to derive above-average profits after the information becomes publicly available.

Example of empirical evidence that tend to support the EMH implication are given below-

b.

Example of empirical evidence that tend to refute the EMH implication are given below-

c.

Even if markets are semi-strong form efficient, an investor would not choose to index due to certain tax consideration. Otherwise, he might do so due to certain risk management issues like exposure to certain industry risk.

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