Strong-Form EMH

· Security prices reflect all information both public and private
· No investor would be able to profit above the average investor even if he was given new information.

Test results:
Supported by evidence that after accounting for transaction costs security analysts and portfolio managers cannot generate excess returns. Corporate insiders and stock market specialists are exceptions who can generate excess returns. But Securities analysts are not able to outperform buy and hold strategy

Semi-strong form EMH:

Semi-strong form EMH:
· Security prices reflect all publicly-available information.
· stocks adjust quickly to absorb new information.
· Fundamental analysis cannot generate excess returns either

Tests:
Event test
Given the assumption that the market is reflective of all publicly available information, an event test analyzes the security both before and after an event. The idea behind the event test is that an investor will not be able to reap an above average return by trading on an event.

Regression/Time Series Tests
Remember that a time series forecasts returns based historical data. As a result, an investor should not be able to achieve an abnormal return using this method.

Abnormal return = Actual Returnl - Market Return;
Risk adjusted abnormal return = Actual Returnl -Market Return x beta

Test Result: mixed.
The semi-strong form EMH, at times, is both supported and not supported by the tests and analysis done. There has been some evidence that securities are not reflective of the semi-strong form EMH.

Supported by event studies: abnormal returns around stock splits (no LT or ST impact), IPOs (price adjustment occurs within 1 day of offering , exchange listing do not cause permanent change in LR value. and accounting changes).

Rejected by time series tests: term structure of interest rates and dividend yield can be used predict LR prices, earning surprise not be reflected as fast as semistrong EMH expected. Thus one can predict for individual price:

Calendar studies - January anomaly & weekend effect does work

Cross sectional tests -neglected, low PE, and high P/B firms (regardless of the size) have higher returns; small size firms have higher return

Weak form EMH:

· Security prices reflect all historical information.
· The rates of return on the market should be independent; past rates of return have no effect on future rates.
· technical analysis cannot generate excess returns

Tests:
· Statistical Tests for Independence
· To examine the weak form of the EMH test for the independence assumption that the rate of return on the market are independent.

Example:
Autocorrelation test - security returns are not significantly correlated over times
Runs test- stock price changes are independent over time

Test result: support
The weak-form EMH is supported by the tests and analysis done. Essentially, the weak-form holds that abnormal returns are not achievable with the use of past-historical data as a means to generate returns.

Supported by statistical tests {autocorrelation – security returns are not significantly correlated over times and runs- stock price changes are independent over time}

Trading rule tests that show no excess return can be generated after accounting for transaction costs.(filter rules entail trading stocks when rices move up or down certain amounts).

Other trading rules- show that it does not outperform a buy-&-hold strategy after taking account of commission.