IAI Actuarial Core Principles · Economic Modelling · Rational expectations theory and the efficient markets hypothesis
Which finding would provide the strongest evidence against strong-form market efficiency?
Consistent abnormal returns earned by corporate insiders trading in their own company's shares is the strongest evidence against strong-form efficiency. Strong form claims prices already reflect private information, so insiders should not profit from it. If they do, private information is not fully impounded in prices.
- AMutual fund managers on average fail to beat the index after costs
- BPrices react within minutes to public RBI policy announcements
- CCorporate insiders earn consistent abnormal returns on trades in their own company's sharesCorrect
- DTechnical trading rules produce no excess returns after costs
- Small-firm shares have higher average returns than large-firm shares
Explanation
Strong-form efficiency says prices reflect all information, including private information. Consistent abnormal profits by insiders show private information is not fully reflected. The other options relate to weak or semi-strong form or support efficiency.
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