Efficient Markets, News, and Short-Term Price Noise
Summary
The document considers why a stock price can move repeatedly even when company news does not arrive at the same pace. It presents price as a noisy proxy for underlying value: after news, market participants may take time to interpret its implications and trade toward a new equilibrium. Trading and price adjustment can continue during that process, so observed movements need not be a single clean jump.
It contrasts this practical account with forms of the efficient market hypothesis. Strong-form efficiency allows for private information to influence prices, while semi-strong efficiency says public information is reflected in prices. In practice, incorporation may be delayed or may overshoot, and high-frequency observations contain market microstructure noise. The note offers conceptual explanations rather than empirical tests; it does not establish which mechanism explains a particular price move or how much exploitable profit any lag creates.
Key ideas
- Observed prices can adjust over time as traders interpret new information and reach an equilibrium.
- A market price can be a noisy proxy for underlying value, especially in high-frequency data.
- Strong-form EMH includes the possibility that private information affects prices.
- Semi-strong EMH holds that public information is reflected in prices, though real adjustments may be imperfect or delayed.
Tags
Full text
# How does the efficient market hypothesis fit with the rapid changes in prices? # How does the efficient market hypothesis fit with the rapid changes in prices? The price of IBM changes from second to second, but there's no way that actual news about IBM is coming out that fast. The information available about IBM changes a lot more slowly than its share price. If I am to believe that the market is setting the price at exactly what IBM is worth, how can the "true price" of IBM be changing so quickly? ## Answer by Kevin (score 1, accepted) https://quant.stackexchange.com/a/46660 You‘re right. The "true price" should only jump when news arrives but in practice, market participants need time to arrive at a new equilibrium, i.e. the market needs some time until it is clear how the news affects the price. Therefore, you see more adjustments taking place and more trading after arriving news. The description above gives some reasoning why prices changes in a more noisy way and don’t simply jump. After all, it’s just a theory and does not translate to real life with 100%. Indeed, you could view the stock price as a noisy proxy for the true price. This is in particular true for high-frequency data where there is a lot of market microstructure noise. ## Answer by Chris (score 2) https://quant.stackexchange.com/a/46672 It depends on which form of EMH you're considering as to provide a rationale. Strong-form EMH could or would assert there's private information potentially changing hands that agents are acting on to cause the price movement. Semi-strong form EMH would suggest all available public info (eg, the news you reference WRT IBM) is immediately incorporated into share price, nullifying any ability to extract a profit. The reality, as the other user noted in his/her response, is that this information is often incorporated imperfectly in practice, whether that be at a lag or in an overeaction at its release.
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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.