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

Which statement about the relationship between the three forms of the Efficient Markets Hypothesis is correct?

Strong-form efficiency implies semi-strong, which implies weak-form. The information sets are nested, with past prices inside public information and public information inside all information, so efficiency with respect to a larger set covers the smaller ones.

  1. AWeak-form efficiency implies semi-strong efficiency
  2. BSemi-strong efficiency implies strong-form efficiency
  3. CStrong-form efficiency implies semi-strong efficiency, which implies weak-form efficiencyCorrect
  4. DThe three forms are independent of each other
  5. Semi-strong efficiency implies weak-form efficiency but strong-form efficiency does not imply semi-strong

Explanation

The information sets are nested: past prices are within public information, which is within all information including private. If prices reflect all information (strong), they reflect public information (semi-strong), and hence past prices (weak). The reverse implications do not hold, so the last option is wrong because strong does imply semi-strong.

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