Just started reading Ch 1 of the CM2 notes. Section 1.2 says "strong form efficiency implies semi-strong form efficiency"... "semi-strong form efficient must also be weak form efficient" based on how historical price data is a subset of all publicly available information, and how publicly available information is a subset of all information. I'm having trouble following the reasoning. For simplicity let's examine the statement "strong form efficiency implies semi-strong form efficiency". 1. In semi-strong efficiency, market price incorporates all publicly available information 2. In strong efficiency, market price incorporates all publicly available information PLUS insider knowledge How can strong form efficiency imply semi-strong efficiency if market price in strong form efficiency incorporates insider knowledge? Am I understanding the implication correctly - I almost feel it should be reversed.
Finally I think I understand this using a few Venn diagrams, strong form efficiency is a subset of semi-strong which is a subset of weak. Hence strong form implies semi-strong form implies weak form in the same way that a square implies a rectangle but not vice versa.
Yep exactly Tess I'll post a pic to show you that Strong form efficiency implies that all private and public information is incorporated into the current price. It implies semi-strong form as semi-strong form is the public information that is already reflected in strong form as well, as strong form is a subset of semi-strong Hope that helps, James
Thanks for clarifying, James. My confusion came from having the Venn diagrams go the wrong way, since: historical price data is a subset of publicly available information which is a subset of all information!
