2
$\begingroup$

My understanding of markets is very limited, and I mostly have a theoretical understanding of issues of these sorts.

Under the Efficient Market Hypothesis, we assume that the stock market reflects a perfect pricing of stocks given publicly available information.

Now, lets say that for some reason you obtain or deduce some information that predicts that a stock is undervalued, and then you purchase the undervalued stocks. And then assume you publicly release the information you've obtained, which then per the EMF, would eventually lead to the stock being priced at a fair value, earning you a profit.

Such an analysis should also work even if your information predicts that a stock is undervalued, considering that you purchase shorts instead.

Under such analysis, you might conclude that it is in the interest of participants to be open with their information, but in practice we see that financial information is kept very secretively, and any leads or tips are rare to come by.

What is wrong with this analysis?

Improve this question
$\endgroup$
2
  • $\begingroup$ In my opinion this is a very sagacious question. I wonder how EMH theoreticians would answer it. (IMHO most people trade without having any definite information that they could disclose. For some reason the volume of trading is far larger than information based theory would imply. => There must be other motives for trades than information). $\endgroup$
    – nbbo2
    Commented Feb 5, 2020 at 17:54
  • $\begingroup$ Did you find a good answer to this question? $\endgroup$
    – Mercadian
    Commented Sep 14, 2022 at 16:59

1 Answer 1

Reset to default
1
$\begingroup$

The Efficient Market Hypothesis is stated correctly in here. However, please notice that it is not a law of nature. According to such an hypothesis, prices will always reflect the true price of an asset as they contain all available information. Now, this is a general definition, but since financial economists have different opinions about it and many do not believe in such a strong hypothesis, some have come up with a distinction based on how much you believe in the possibility that prices are always "true". Bodie, Kane, Markus (2011) distinguish between a weak form, a semistriong form and a strong form of EMH. In these cases, market prices reflect respectively: all info that can be derived from past market data; all PUBLICLY available info; all info available, even the insider one. So your "assumption" would not be possible in the strong form, but it would be possible in the weak and semi-strong form, in which case you could make profits thanks to mispricing without contrasting those versions of EMH. To sum up: the answer to your question strongly depends on which definition of EMH we are ready to accept.

Improve this answer
$\endgroup$
1
  • 1
    $\begingroup$ this analysis is likely correct, but i hesitate to upvote it since it doesn't provide a direct response to the question asides from "it depends on...." $\endgroup$
    – k.c. sayz 'k.c sayz'
    Commented Feb 7, 2020 at 2:14

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service and acknowledge you have read our privacy policy.

Not the answer you're looking for? Browse other questions tagged or ask your own question.