Exam 2 - Chapter 8 [BOOK} Flashcards
random walk
The notion that stock price changes are random and unpredictable.
efficient market hypothesis (EMH)
The hypothesis that prices of securities fully reflect available information about securities
The weak-form hypothesis asserts
asserts that stock prices already reflect all information that can be derived by examining market trading data such as the history of past prices, trading volume, or short interest. This version of the hypothesis implies that trend analysis is fruitless. Past stock price data are publicly available and virtually costless to obtain. The weak-form hypothesis holds that if such data ever conveyed reliable signals about future performance, all investors already would have learned to exploit them. Ultimately, the signals lose their value as they become widely known because a buy signal, for instance, would result in an immediate price increase.
weak-form EMH
The assertion that stock prices already reflect all information contained in the history of past trading.
The semistrong-form hypothesis states that
all publicly available information regarding the prospects of a firm already must be reflected in the stock price. Such information includes, in addition to past prices, fundamental data on the firm’s product line, quality of management, balance sheet composition, patents held, earning forecasts, and accounting practices. Again, if investors have access to such information from publicly available sources, one would expect it to be reflected in stock prices.
semistrong-form EMH
The assertion that stock prices already reflect all publicly available information
Finally, the strong-form version of the efficient market hypothesis states
that stock prices reflect all relevant information, even including information available only to company insiders. This version of the hypothesis is quite extreme. Few would argue with the proposition that corporate officers have access to pertinent information long enough before public release to enable them to profit from trading on it. Indeed, much of the activity of the Securities and Exchange Commission is directed toward preventing insiders from profiting by exploiting their privileged position. Rule 10b-5 of the Security Exchange Act of 1934 sets limits on trading by corporate officers, directors, and substantial owners, requiring them to report trades to page 229the SEC. These insiders, their relatives, and any associates who trade on information supplied by insiders are considered in violation of the law.
strong-form EMH
The assertion that stock prices reflect all relevant information, including inside information.
