IAI Actuarial Core Principles · Economic Modelling · Rational expectations theory and the efficient markets hypothesis
Which of the following findings would be regarded as evidence against strong-form market efficiency?
Consistent abnormal returns earned by corporate insiders trading on private information are evidence against strong-form efficiency, because that form claims prices already reflect all information, including private. The other findings relate to weak-form or semi-strong efficiency and are consistent with them.
- ACorporate insiders consistently earn abnormal returns on trades in their own company's sharesCorrect
- BTechnical analysts fail to beat a buy-and-hold strategy
- CPublished accounting information is reflected in prices within minutes
- DIndex funds match average active fund returns after costs
- Share price changes are uncorrelated from day to day
Explanation
Strong-form efficiency says all information, public and private, is reflected in prices, so even insiders cannot earn abnormal returns. Consistent insider profits contradict this. The other options support weak or semi-strong efficiency.
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