If a market is semi-strong form efficient, prices reflect all public information.
Manager can’t consistently generate excess returns using fundamental analysis.
Question: Availabe public information will not forecast future number, but fundamental analysis, say P/E (estimate), does. Why fundamental analysis doesn’t work in semi-strong form efficient market? Thanks.
A forecast P/E ratio is based on public information, no?
Here’s a very bare-bones summary of EMH:
Weak-form efficient - Technical analysis doesn’t work, but you can still get better returns by using fundamental analysis.
Semi-strong form - Neither fundamental nor technical analysis will yield superior returns. You need inside information to get superior returns.
Strong-form - There is no information that is known or knowable (including inside information) that will yield superior investment returns.
EMH – Efficient market hypothesis – H0: markets reflect all information. (No access return possible). Three version:
Weak form: Market reflects only past price and volume information.
Semi-strong form: Market reflects all public information including past price and volume.
Strong form: Market reflects all information. (Public, past prices and volume and Nonpublic).
Support:
Week and Semi-strong supported: past price trend reflects current prices and also for example, stock split (public information) is a good sign but everyone knows so prices will reflect it and no excess return possible (supports null hypothesis). However, you don’t know in advance that stock will split (nonpublic information) so if you know it, might be possible to earn excess return. (So contrary to null hypothesis current markets are not strong).