Insider Trading and Efficient Market Hypothesis Flashcards
What is insider trading?
trading of securities while possessing non-public information about securities.
this type of trading is illegal because it undermines investor confidence in the integrity and fairness of the financial markets.
the efficient market hypothesis
hypothesis states that current stock prices immediately and fully reflect all relevant information.
Hence, the market is continuously adjusting to new information and acting to correct pricing errors.
with regards to Efficient market hypothesis, Securities prices are always in equilibrium, what is the reason ?
the reason is that securities are subject to intense analysis by many thousands of highly trained individuals.
these analysts work for well-capitalized institutions with resources to take very rapid action when new information is available .
REGARDING TO The Efficient Market Hypothesis does it possible to obtain abnormal returns consistently with either fundamental or technical analysis .
The Efficient Market Hypothesis states that its impossible to obtain abnormal returns consistently with either fundamental or technical analysis .
Fundamental Analysis
is the evaluation of a security’s future price movement based upon sales , internal developments , industry trends , the general economy and expected changes in each factor.
Technical analysis
is the evaluation of a security’s future price based on the sales price and number of shares traded in a series of recent transactions.
Strong Form
The strong form of the EMH holds that prices always reflect the entirety of both public and private information. This includes all publicly available information, both historical and new, or current, as well as insider information. Even information not publicly available to investors, such as private information known only to a company’s CEO, is assumed to be always already factored into the company’s current stock price.
So, according to the strong form of the EMH, not even insider knowledge can give investors a predictive edge that will enable them to consistently generate returns that outperform the overall market average.
Semi-strong Form
The semi-strong form of the theory dismisses the usefulness of both technical and fundamental analysis. The semi-strong form of the EMH incorporates the weak form assumptions and expands on this by assuming that prices adjust quickly to any new public information that becomes available, therefore rendering fundamental analysis incapable of having any predictive power about future price movements. For example, when the monthly Non-farm Payroll Report in the U.S. is released each month, you can see prices rapidly adjusting as the market takes in the new information.
Weak Form
The weak form of the EMH assumes that the prices of securities reflect all available public market information but may not reflect new information that is not yet publicly available. It additionally assumes that past information regarding price, volume, and returns is independent of future prices.
The weak form EMH implies that technical trading strategies cannot provide consistent excess returns because past price performance can’t predict future price action that will be based on new information. The weak form, while it discounts technical analysis, leaves open the possibility that superior fundamental analysis may provide a means of outperforming the overall market average return on investment.
All public and private information is instantaneously reflected in securities’ prices.
Thus, insider trading is assumed not to result in abnormal returns.
Strong Form
All publicly available data are reflected in security prices, but private or insider
data are not immediately reflected. Accordingly, insider trading can result in
abnormal returns.
Semistrong Form
Current securities prices reflect all recent past price movement data, so technical
analysis will not provide a basis for abnormal returns in securities trading.
Weak Form
