Further reading
l The current price of any security represents a consensus view of the security’s
current worth – its price is the result of the actions of buyers and sellers, each
with different perceptions of the value of the security.The evidence on CME
l Research studies have been conducted that look at efficiency at three different
levels:
lweak form (WF);
lsemi-strong form (SSF); and
lstrong form (SF).
l WF efficiency would exist if it were not possible to make abnormal profits
from security investing relying on past security price movements (for exam-
ple, with the use of charts) or technical rules to indicate when to buy and sell.
l Evidence shows that the world’s leading markets are WF efficient.
l SSF efficiency would exist if it were not possible to make abnormal profits
from security investing relying on the analysis of publicly available informa-
tion to indicate when to buy and sell.
l Evidence shows that the world’s leading stock markets are SSF efficient.
l SF efficiency would exist if it were not possible to make abnormal profits from
security investing relying on the analysis of information available only to
insiders to indicate when to buy and sell.
l Evidence shows that the world’s leading markets are not SF efficient.Implications of CME
l Implication for investors: only if they have access to information not available
to the public can they expect, except by chance, to make better-than-average
returns, given the risk class of the securities concerned.
l Implications for financial managers:
lIt is difficult to fool investors.
lThe market rationally values the business.
lEfforts to enhance share value should have that effect.
lManagers may have a short-term interest in withholding information.
lThe LSE rationally values assets with risky returns.The role and operation of the LSE are covered by a number of texts including Arnold (2005).
Facts and figures on the LSE are published monthly in The Stock Exchange Fact Sheets
(http://www.londonstockexchange.com/en-gb/about/statistics/factsheets/ ).
Capital market efficiency is well reviewed in the literature, for example in Emery, Finnerty and
Stowe (2007).
For an impressive review of empirical studies of market efficiency, see Dimson and Mussavian
(1998) (available on http://faculty.london.edu/edimson/market.pdf ).Further
reading