How EMH Forms Distinguish Public Information and Trading Profits
Summary
The document examines a puzzle about the Efficient Market Hypothesis: if traders can profit from information about mispriced stocks, why keep that information secret instead of publishing it after taking a position? Its answer is that the conclusion depends on which form of EMH is assumed.
Weak-form EMH says prices reflect past market data, while semi-strong EMH says they reflect publicly available information. Under either version, newly derived information may reveal mispricing and permit profits before the market incorporates it. Strong-form EMH includes private and insider information in prices, so the proposed opportunity would not arise under that assumption. The explanation is conceptual rather than empirical: it outlines definitions and implications but provides no market evidence, trading procedure, or estimate of potential returns. It also does not explore other reasons information may remain private, such as the cost of producing it or the incentives of its owner.
Key ideas
- The implications of EMH depend on whether it is defined in weak, semi-strong, or strong form.
- Weak-form EMH concerns information derived from past market data.
- Semi-strong EMH assumes prices reflect publicly available information.
- Strong-form EMH includes private information, making the proposed profit opportunity incompatible with that version.
- The document offers a conceptual distinction and no empirical test of the hypothesis.
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Full text
# Release of information and Efficient Market Hypothesis # Release of information and Efficient Market Hypothesis 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? ## Answer by user9875321__ (score 1) https://quant.stackexchange.com/a/51036 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.
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