Question

Please determine what form of market efficiency is violated by the following anomalies

a)Name the three forms of market efficiency according to Fama.

Please determine what form of market efficiency is violated by the following anomalies.

b)January Effect

c)Momentum Strategy (i.e. stocks with high past returns do well in the future)

d)Earnings Surprises

e)Buying before FOMC meetings (Federal Reserve meetings on interest rates) tends to make money

Answer 1

a). The three forms of market efficiency according to Fama are the weak form efficiency, semi-strong form efficiency and strong form efficiency.

b). January effect violates the weak form of market efficiency (as per January effect, prices tend to move upwards regardless of stock price history, thus, contradicting the weak form).

c). Momentum strategy violates the weak form of market efficiency.

d). Earnings surprises violates the semi-strong form of market efficiency as contrary to it, profits can be made based on expected higher earnings.

e). Making profit by buying before FOMC meetings violates the semi-strong form of market efficiency.