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

Under the semi-strong form of the Efficient Markets Hypothesis, which of the following would be expected to be possible?

Trading on private inside information before announcement could earn abnormal returns under the semi-strong form. That form says prices already reflect all public information, but it does not claim prices reflect information held privately by insiders.

  1. AEarning abnormal returns by trading on newly published annual results immediately after announcement
  2. BEarning abnormal returns from analysing published accounts after they are released
  3. CEarning abnormal returns from charting historical prices
  4. DEarning abnormal returns by trading on private inside information before it is announcedCorrect
  5. Earning abnormal returns by buying shares of firms that have announced stock splits

Explanation

Semi-strong efficiency means prices reflect all publicly available information, including past prices and published accounts. Hence public-information strategies (accounts, announcements, splits, charts) cannot earn abnormal returns. Only private or inside information is not assumed to be reflected in prices, so insider trading could still be profitable under this form.

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