Financial Education

In a strong-form efficient market no group of investors should be able to generate excess risk-adjusted returns. Technical analysis, fundamental analysis, and even inside information will provide little value once the information is known.

Tests of the strong form efficient market hypothesis have generally examined the performance of four groups of investors.

1. Corporate insiders
2. Stock exchange specialists
3. Security analysts
4. Professional money managers

Studies of insider buying and selling have provided mixed support for the EMH. At one time, insiders and public investors following insider trades experienced excess risk adjusted returns. However, more recent studies have indicated that public traders can no longer profit after adjusting for transaction costs.

Stock exchange specialists have monopolistic access to certain market data such as unfilled limit orders. Data suggests that specialists are able to earn excess risk-adjusted returns due to their access to this data.

There is some evidence that certain analysts may possess superior information, and that following the recommendations of these analysts may permit excess returns. Often these anomalies appear to be incorporated, which would support the EMH. For example, the Value Line timeliness rating was considered enigmatic as it appeared to consistently predict returns. However, changes in rating are now incorporated in stock prices within a day or two, and transaction costs may limit any usefulness of the anomaly.

In general, tests of professional investors have supported the EMH. On average, such investors do not enjoy superior risk-adjusted returns.

For more information, see all articles on: Active Management, Fundamental Analysis, Institutional Investing, Investing in Stocks, Investment Returns, Passive Management, Research

See also:

Efficient Market Hypothesis: Strong Form

Efficient Market Hypothesis: Semi-Strong Form

Limitations to Achieving Fully Efficient Markets

Are Markets Semistrong Form Efficient?

Are Markets Weak-Form Efficient?