Lesson 3 of 7 · 15 min
Weak, semi-strong and strong forms
Fama's three forms differ only in the information prices are assumed to reflect: past market data (weak), all public information (semi-strong) or all public and private information (strong); each form contains the ones below it, and the evidence for developed markets supports the first two but not the third.
In short
- Weak form: prices reflect all past market data (historical prices and trading volume), so past patterns cannot predict future price changes.
- Semi-strong form: prices reflect all publicly available information (financial statements, announcements and market data), so analysing public news cannot earn abnormal returns. It includes the weak form.
- Strong form: prices reflect public and private information, so even insiders cannot earn abnormal returns. It includes both other forms.
- Abnormal return = actual return − expected return. Consistently earning abnormal returns from some information set is evidence against efficiency with respect to it.
- Tests: weak form by serial correlation and trading rules; semi-strong form by event studies; strong form by testing whether nonpublic information earns abnormal profits.
- Evidence: developed markets look weak-form and semi-strong-form efficient; no market is strong-form efficient; some developing markets may not be weak- or semi-strong-form efficient.
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