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IAI Actuarial Core Principles · Economic Modelling · Rational expectations theory and the efficient markets hypothesis

An analyst in Mumbai finds that investors who buy shares of Indian companies immediately after public quarterly results announcements earn no abnormal return, but a fund manager trading on undisclosed board decisions does earn abnormal returns. Which conclusion is most consistent with these findings?

The evidence indicates semi-strong but not strong form efficiency. Public announcements are already reflected in prices, so trading on them gives no abnormal return, yet private information still earns excess returns, which would be impossible if prices reflected all information.

  1. AMarkets are semi-strong form efficient but not strong form efficientCorrect
  2. BMarkets are weak form inefficient
  3. CMarkets are strong form efficient
  4. DMarkets are neither weak nor semi-strong nor strong form efficient
  5. Markets are strong form efficient but not weak form efficient

Explanation

No abnormal return from trading on public results suggests public information is already reflected, which is semi-strong efficiency. Abnormal returns from private information contradict strong form efficiency. Semi-strong efficiency implies weak form holds too, so the weak-form-inefficient option is not supported.

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