Semi-strong-form Efficiency
Also written Semi-strong form EMH · Semi-strong form of efficiency · Semi-strong efficient market hypothesis
The hypothesis that prices reflect all historical and publicly available information and adjust rapidly to news — so neither technical nor fundamental analysis earns above-average risk-adjusted returns.
In plain language
Semi-strong form is the middle level of the efficient market hypothesis. It is also the one that matters most in practice.
It says prices reflect everything in the weak form. That means past prices, returns and volume. Prices also reflect all public information. Examples are:
- earnings and dividend news;
- P/E, dividend-yield and price-to-book ratios;
- news of a company being restructured;
- stock splits;
- economic and political news.
When such news comes out, prices adjust quickly and correctly. So acting on news after it is public will not help. You cannot expect returns above average once risk is taken into account. By the time you have read the results, the price has already moved.
How it works
The workbook's implication for fundamental analysis: analysts value securities from publicly available information. If the market is semi-strong-form efficient, trading on that information "will not yield investors the chances of generating superior risk adjusted return considering that securities prices immediately reflect all such new public information".
The workbook's own example of what this means: in an efficient market, a stock with a PEG ratio below 1.0 is no more or less likely to be undervalued than a stock with a high PEG.
Two documented anomalies challenge the semi-strong form directly, because they use public data:
- Size anomaly — small firms have consistently earned higher risk-adjusted returns than large firms; the construction of small-cap portfolios is a direct outcome.
- Value anomaly — stocks with a high book-value-to-price ratio have generated superior risk-adjusted returns, which is at the heart of value investing's popularity.
The workbook's internal contradiction closes the loop: markets become efficient only because many participants believe they are not and trade on information to beat them.
A worked example
Illustrative figures. A listed FMCG company announces its quarterly results at 4:00 pm on a Tuesday: net profit up 25% against a consensus of 12%. The stock closed at ₹800.
- At the next morning's open, the stock trades at ₹880 — the market has absorbed the surprise before most investors have read past the headline.
- At noon, an investor reads a detailed analysis of the results, agrees the company is strong, and buys 1,000 shares at ₹880 — ₹8.8 lakh.
Under semi-strong efficiency, her analysis is correct and her trade is still not profitable in excess of normal returns. The ₹80 re-rating happened overnight, on public information, before she acted. From ₹880 onwards, the stock is expected to earn only the return its risk warrants.
Contrast a portfolio manager who, through her own analysis of public filings months earlier, concluded that margins would expand — and bought at ₹650. Under semi-strong efficiency, that too should not work consistently. If she can do it repeatedly, on a risk-adjusted basis, that is evidence against semi-strong efficiency — or evidence of an anomaly.
Why NISM asks about it
Chapter 13 (Concept of Informational Efficiency), sections 13.2.2 and 13.5.2, defines the semi-strong form and its implication for fundamental analysis; section 13.4 presents the size and value anomalies that contradict it; section 13.5.4 connects efficiency to the rise of index funds. A Chapter 13 sample question on efficiency and the lack of superior analysts has index funds as the answer.
Common exam traps
- Semi-strong includes weak. It covers historical market data and public information.
- It rules out both technical and fundamental analysis of public information — not only fundamental.
- It does not cover insider information. That is the strong form.
- The size and value anomalies are evidence against semi-strong efficiency, because they rest on public information (market value, book-to-price).
- "Price adjustments are biased" is what would be inconsistent with an efficient market — adjustments must be rapid and unbiased, not merely rapid.
- The logical response to an efficient market, in the workbook, is to minimise transactions — indexing — not to stop investing.
Where this is taught
Free preparation for NISM Series XXI-BRelated terms
- Efficient Market HypothesisThe proposition that share prices already incorporate and reflect all relevant information — which, if true, leaves nothing for an analyst to find by studying that information.
- Fundamental analysisEstimating what a share is worth from the profits and cash flows the business will generate, then buying only when the market price sits below that estimate.
- Market anomalyA pattern of returns that departs from what an asset's fundamentals and risk — as measured by CAPM or another pricing model — say it should earn, and so contradicts market efficiency.
- Strong-form EfficiencyThe most extreme form of the efficient market hypothesis: prices reflect all historical, public and insider information, so no group of investors can earn above-average risk-adjusted returns.
- Weak-form EfficiencyThe hypothesis that current prices already reflect all historical market information — past prices, returns and volumes — so technical analysis cannot earn above-average risk-adjusted returns.
- Informational EfficiencyHow fully and quickly security prices reflect available information. It is what "market efficiency" usually means, as against operational efficiency, which is about transaction costs.
- Size AnomalyThe finding that small firms, measured by total market value, have consistently earned larger risk-adjusted returns than large firms — contradicting market efficiency.
- Value AnomalyThe finding that stocks with a high book value-to-price ratio have earned superior risk-adjusted returns — an anomaly against the EMH that underpins value investing.
- Fair Game ModelEugene Fama's 1970 framing of the efficient market hypothesis: current price fully reflects available information, so no investment strategy can consistently earn above-average risk-adjusted returns.
- Internal contradiction of efficiencyThe paradox that a market can only become informationally efficient if enough participants believe it is not — because it is their search for mispricing that drives prices to fair value.
- Unbiased EstimateThe technical definition of an efficient market price: the market price is an unbiased estimate of a security's true value, so deviations are random rather than one-sided.