Fama (1970) identified 3 different forms of Stock Market efficiency; weak, semi-strong and strong. Weak form efficiency is considered to be the minimum required for a market to operate and the current share price is based only on the past performance of the share price of a company. Most stock exchanges operate at a higher level than this since there are no mechanical trading rules that can generate profits in excess of the average return.
Semi-strong form efficiency is based on past share price movements and all publicly available information and the market will react quickly and rationally to any new information. This is the category that most stock exchanges fall into as they can't make abnormal returns by studying the news as the share prices will already have been updated with all publicly available information. For example, on Friday 8th February, the share price of Moody's, a credit agency, fell 6.6% because of legal action being taken within the industry. This shows not only that as soon as news becomes publicly available there is a visible impact on a company but also that the company doesn't even need to be directly involved with the story but because it is working within the same industry the negative information also had an impact on Moody's. This is also despite the fact that the CEO stated that he had no knowledge of any impending legal action after one of their competitors (Standard & Poor) was sued by the US Government.
Kendal (1953) also had some theories that Fama built upon for his Forms of Efficiency. He stated that there was no systematic link between one price movement and the subsequent ones. This is evidenced by Moody's share price falling despite the announcement of a 66% net profit increase in the last quarter of 2012. (Considered good news!)
This also shows that the share price reflects all known information at all times.
Recently Boeing, the airplane manufacturer has encountered problems with the batteries on some of its new Dreamliner planes and has had to delay the delivery of many orders. This has had a negative impact on the share price of Boeing.
However, there are anomalies that have been discovered and subsequently solved due to the nature of the stock exchanges around the world and those stock brokers working in them.
For example, the time of day effect, which works in 2 ways. Before the weekend prices may increase as buyers want to have a good portfolio before the weekend and then on Monday morning the share prices tend to fall as they get rid of shares they decided they didn't need over the weekend. There was a time when if information came out at lunch time then the share price was not adjusted and it was possible to make abnormal gains because all the analysts would be out having lunch. This was easily solved by having staggered lunch breaks. However, many stock exchange workers now hardly ever leave their desks during the day until the market closes, so as to avoid missing any information.
The final form of efficiency is is Strong form efficiency. This implies that all information (public or not) is reflected in the share price. This implies that not even insider dealing would lead to abnormal gains, therefore markets can often be described as strong form inefficient. This leaves the market open to insider dealing but there is a serious threat of imprisonment for this behavior. There haven't been any recent examples of insider dealing but the Former CEO of Enron Jeff Skilling was a high profile example in the early naughties.
These forms of efficiency mean that abnormal gains can only be made by chance or through illegal means.
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