The Strong Form

Even the strongest adherents to the efficient-market hypothesis would not be surprised to find that markets are inefficient in the strong form. After all, if an individual has information that no one else has, it is likely that he can profit from it.

One group of studies of strong-form efficiency investigates insider trading. Insiders in firms have access to information that is not generally available. But if the strong form of the efficient-market hypothesis holds, they should not be able to profit by trading on their information. A government agency, the Securities and Exchange Commission, requires insiders in companies to reveal any trading they might do in their own company's stock. By examining the record of such trades, we can see whether they made abnormal returns. A number of studies support the view that these trades were abnormally profitable. Thus, strong-form efficiency does not seem to be substantiated by the evidence.26

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