Strong form of the EMT

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Strong form of the EMT

Theory that market prices reflect all relevant publicly and privately available information. Defined by Eugene F. Fama in 1970.
Copyright © 2012, Campbell R. Harvey. All Rights Reserved.

Strong Form of the EMT

The most controversial form of the efficient markets theory on how markets work. It holds that the market efficiently deals with all information on a given security and reflects it in the price immediately. Even insider information is immediately reflected in security prices. Therefore, the model holds that technical analysis, fundamental analysis, and any speculative investing based on them are useless. Investors and academics disagree on how well the model works. See also: Weak form of the EMT, Semi-strong form of the EMT.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved
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Additionally, Fama (1970), also classified the market efficiency into three different categories, each category is characterized in terms of different forms of information as; (i) weak form efficiency, which defines that equity prices fully reflect all available information about the historical trading; (ii) semi- strong form efficiency, which delineates that the publicly available information is fully reflected by the equity prices; and (iii) the strong form efficiency which proclaims that the equity prices fully reflect possible relevant information along with inside information of the company.
When a foreign exchange market is strong form efficiency it reflects both information contained in past exchange rates and publicly available information.
Under strong form efficiency, all information even apparent company secrets--is incorporated in security prices and thus, no investor can earn excess profit by trading on public or non-public information.
Wong and Kwong (1984) suggest that if the evidence fails to support weak-form efficiency, it is unnecessary to test the semi-strong form or strong form efficiency at the stricter levels.
The theory of efficient market hypothesis presented by Beechey (2000) (strong form efficiency) relies only on the current price of an asset to describe its overall performance.
The much acclaimed paper on Efficient Market Hypothesis (EMH) by Fama (1970) defined market efficiency into three subsets: Weak Form Efficiency, whereby future prices cannot be predicted by past prices; Semi-Strong Efficiency, whereby future prices cannot be predicted by publically available information; and Strong Form Efficiency, whereby prices reflect all information, both public and private.
There are two main groups of investors that have been studied in the developed markets for testing strong form efficiency, namely mutual funds and company insiders.
Weak form efficiency implies that returns will be negative across all odds categories, while strong form efficiency says that returns will be identical (equal to -t) across all odds categories.
Strong form efficiency would seem not to be supported by the data in Figures 1-4.