What Is Strong Form Efficiency?

Strong form efficiency is the most stringent version of the efficient market hypothesis (EMH) investment theory, stating that all information in a market, whether public or private, is accou꧒nted for in a stock's price.

Practitioners of strong form efficiency believe that even 澳洲幸运5开奖号码历史查询:insider information cannot give an investor an advantage. This degree of 澳洲幸运5开奖号码历史查询:market efficiency implies that profits exceeding normal returns cannot be realized regar⭕dless of the amount of research or information investors have access to.

Understanding Strong Form Efficiency

Strong form efficiency is a component of the EMH and is considered part of the 澳洲幸运5开奖号码历史查询:random walk theory. It states that the price of 澳洲幸运5开奖号码历史查询:securities and,🐷 therefore the overall market, are not random and are influenced🔜 by past events.

Strong form ef꧂ficiency is one of the three different degrees of the EMH, the others being weak and🦋 semi-strong efficiency. Each one is based on the same basic theory but varies slightly in terms of stringency.

S𝕴trong Form Efficiency vs. Weak Form Eff☂iciency and Semi-Strong Form Efficiency

The 澳洲幸运5开奖号码历史查询:weak form efficiency theory, the most lenient of the bunch, argues that stock prices reflect all current information but also concedes that 澳洲幸运5开奖号码历史查询:anomalies may be found by researching companies' 澳洲幸运5开奖号码历史查询:financial statements thoroughly.

The 澳洲幸运5开奖号码历史查询:semi-strong form efficiency theory goes one step further, promoting the idea that all information in the public domain is used in the calculation of a stock's 澳洲幸运5开奖号码历史查询:current price. That means it is impossible for investors to identify 澳洲幸运5开奖号码历史查询:undervalued securities and generate higher returns in the market by utilizing either 澳洲幸运5开奖号码历史查询:technical or 澳洲幸运5开奖号码历史查询:fundamental analysis.

Those who subscribe to this version of the EMH believe that only information that is not readily available to the public can help✨ investors boost their returns to a performance level above that of the general market. The strong form efficiency theory rejects this notion, stating that no information, public or inside information, will benefit an investor because even inside information is reflected in the cur🌼rent stock price.

History of Strong Form Efficiency

The concept of strong form efficiency was pioneered by Princeton 澳洲幸运5开奖号码历史查询:economics professor Burton G. Malkiel in his book published in 1973 entitlꦅed "A 🏅Random Walk Down Wall Street." 

Malkiel described 澳洲幸运5开奖号码历史查询:earnings estimates, technical analysis, and 澳洲幸运5开奖号码历史查询:investment advisory services as “useless.” He said the best way to maximize returns is by following a 澳洲幸运5开奖号码历史查询:buy-and-hold strategy, adding that 澳洲幸运5开奖号码历史查询:portfolios constructed by experts 🅷should fare no better than a basket of stocks put together by a blindfolded monkey.

Example of Strong Form Efficiency

Most examples of strong form efficiency involve insider informa🌞tion. This 🐬is because strong form efficiency is the only part of the EMH that takes into account proprietary information. The theory states that contrary to popular belief, harboring inside information will not help an investor earn high returns in the market.

Here’s an example of how strong form efficiency could play out in real life. A 澳洲幸运5开奖号码历史查询:chief technology officer (CTO) of a public technology company believes that his firm will begin to lose customers and revenues. After the internal rollout of a new product feature to beta testers, the CTO's fears are confꦰirmed, and he knows that the official rollout will be a flo💖p. This would be considered insider information.

The CTO decides to take up a 澳洲幸运5开奖号码历史查询:short position in his own company, effectively betting against the stock price movement. If the stock pri🐓ce declines, the CTO will profit&nb༺sp;and, if the stock prices increases, he will lose money.

However, when the product feature is released to the public, the stock price is unaffected and does not decline even though customers are disappointed with the product. This market is strong form efficient because even the insider information o𒅌f the product flop was already priced into the stock. The CTO would 𒁃lose money in this situation.