You are reading the 2026 curriculum (exams up to November 2026). Sitting in February 2027 or later? Go to the 2027 Equities guide.
Weak, semi-strong and strong-form efficiency
Weak form: prices reflect all past market data (prices, volume). Semi-strong form: prices reflect all public information, including past market data. Strong form: prices reflect all public and private information. Each form includes the one before it. Evidence supports weak and broadly semi-strong efficiency in developed markets, but not strong form.
Before this: What an efficient market is, and what makes one
On the exam
- Contrast weak-form, semi-strong-form, and strong-form market efficiency
Contrast weak-form, semi-strong-form and strong-form efficiency. Expect: an investor earns abnormal returns using some piece of information, and you pick the form that is violated; an abnormal return from an event study; the nesting rule.
How deeply to learn each part
- Know the idea
- Understand it in general. It frames other topics, but you will not calculate with it.
- Use it
- Understand it well enough to solve a question with it. Recognize when it applies.
- Memorize
- Learn it by heart. The exam will not give it to you.
You know this one. The full lesson is folded away. The takeaways, formulas and checkpoint below are your quick refresher, and the checkpoint is a fair test of whether you still do.
You tested strong here. The full lesson is folded away. The takeaways, formulas and checkpoint below are your quick refresher, and the checkpoint is a fair test of whether you still know it.
What is already in the price under each form?
Each form of efficiency names an information set that prices already reflect. The sets are nested, so each form includes the one before it.
Market data means past prices, returns and trading volume.
- In a weak-form efficient market , prices reflect all market data. Studying past price patterns cannot predict future changes.
- In a semi-strong-form efficient market , prices reflect all public information. That means market data plus financial statements, news, announcements and economic data.
- In a strong-form efficient market , prices reflect all information, public and private. Not even insider information would earn an abnormal return.
- Weak form Memorize prices reflect past market data
- In the price past prices, returns and trading volume
- Cannot earn abnormal returns with technical analysis
- Tested by serial correlation, trading rules
- Evidence holds in developed markets; exceptions in some developing ones
-
- Semi-strong form Memorize prices reflect all public information
- In the price market data plus statements, news, economic data
- Cannot earn abnormal returns with fundamental analysis of public data (on average)
- Tested by event studies
- Evidence broadly holds in developed markets
-
- Strong form Memorize prices reflect all information, public and private
- In the price everything, including insider information
- Cannot earn abnormal returns with anything, even inside information
- Tested by do insiders earn abnormal returns?
- Evidence rejected: insiders do earn them
-
The nesting is the idea to hold on to: strong ⊃ semi-strong ⊃ weak. Past market data are public, and public information is part of all information. So a semi-strong efficient market is also weak-form efficient, and a strong-form efficient market is efficient in all three ways. The reverse is false.
How is each form tested, and what does the evidence say?
Each test asks whether a strategy built on that information set earns abnormal returns after risk and costs.
Weak form. Look for patterns in past prices. One test is serial correlation , the relationship between a security’s return in one period and its return in the next. Daily returns show a little, but not enough to profit from after trading costs. The other test is to try trading rules built on past prices and volume. In developed markets, rules like these do not earn consistent abnormal profits. Some developing markets show exceptions.
Semi-strong form. Use an event study (next section) to see how prices respond to public news. Most results in developed markets support semi-strong efficiency, with a few exceptions that the anomalies lesson covers.
Strong form. Ask whether people with private information, such as insiders, earn abnormal returns. They do, which is why securities laws forbid trading on material non-public information. Markets are not strong-form efficient.
So: weak and broadly semi-strong in developed markets, not strong.
How does an event study work?
An event study measures how much a share moved around a news event beyond what its risk would explain.
- 1. Choose the event and the shares for example an earnings announcement
- 2. Estimate the expected return from beta, a market model or an index
- 3. Abnormal return Use it actual return minus expected return
- 4. Test against zero is the average abnormal return different from zero?
The expected return can come from a market model, from the capital asset pricing model (CAPM) or simply from beta times the market’s return. The abnormal return is the surprise.
On an announcement day the market returns 1.00%. A share with a beta of 1.4 returns 4.60%. Using beta times the market return as the expected return, the abnormal return is closest to:
4.60% − 1.4 × 1.00% = 3.20%
Abnormal return, AR3.20%
- 4.6−(1.4×1)=3.2
- 4.6ENTER1.4ENTER1×−3.2
ENTER enter (on the HP, puts the number on the stack)
What matters for efficiency is when the abnormal return appears.
| Pattern in the weeks around the news | What it suggests |
|---|---|
| One jump on the announcement, then nothing | consistent with semi-strong efficiency |
| A steady drift in the same direction after the news | prices adjust slowly: contradicts semi-strong efficiency |
| A rise before the news is public | information leaked to some traders before the announcement |
If shares keep rising for weeks after a good announcement, anyone can buy on the public news and profit. That contradicts semi-strong efficiency. A rise before the announcement means someone traded on private information.
Exam tip To find the violated form, ask what information the strategy uses. Past prices: weak. Public information: semi-strong. Private information: strong.
Go deeper The joint hypothesis problem
Every test of efficiency also needs a model of expected returns, such as beta times the market return. If the test finds abnormal returns, either the market is inefficient or the model of expected returns is wrong. The two cannot be separated cleanly, which is one reason the debate has never been settled.
Go deeper Why nobody expects strong-form efficiency
Securities laws exist because inside information is valuable. If insiders could not profit from it, there would be little need to ban the trades. The ban also keeps the market fair by giving all investors equal access to the information that moves prices. The evidence agrees: insiders do earn abnormal returns.
Memorize this
MemorizeThe three forms
| Form | Already in the price | No abnormal returns from |
|---|---|---|
| Weak | past prices and volume | technical analysis |
| Semi-strong | all public information | fundamental analysis of public data |
| Strong | public and private information | anything, even inside information |
Memory hook Past, public, private: each form adds one layer of information and removes one more way to win.
Know it cold Strong ⊃ semi-strong ⊃ weak. A semi-strong efficient market is also weak-form efficient, never the reverse.
MemorizeEvidence and event-study patterns
| Pattern or form | Reading |
|---|---|
| Weak and semi-strong | broadly hold in developed markets |
| Strong | rejected, insiders earn abnormal returns |
| One jump at the announcement | consistent with semi-strong |
| Drift after the announcement | contradicts semi-strong |
| Run-up before the announcement | leak of private information |
Memory hook Jump = efficient, drift = slow, run-up = leak.
Know it cold Event study: abnormal return = actual − expected. Expected usually uses beta × market return.
- Weak form Memorize prices reflect past market data
- In the price past prices, returns and trading volume
- Cannot earn abnormal returns with technical analysis
- Tested by serial correlation, trading rules
- Evidence holds in developed markets; exceptions in some developing ones
-
- Semi-strong form Memorize prices reflect all public information
- In the price market data plus statements, news, economic data
- Cannot earn abnormal returns with fundamental analysis of public data (on average)
- Tested by event studies
- Evidence broadly holds in developed markets
-
- Strong form Memorize prices reflect all information, public and private
- In the price everything, including insider information
- Cannot earn abnormal returns with anything, even inside information
- Tested by do insiders earn abnormal returns?
- Evidence rejected: insiders do earn them
-
- 1. Choose the event and the shares for example an earnings announcement
- 2. Estimate the expected return from beta, a market model or an index
- 3. Abnormal return Use it actual return minus expected return
- 4. Test against zero is the average abnormal return different from zero?
Quick example
The market returns 2.5% on an announcement day. A share with beta 0.9 returns 1.4%. Expected 0.9 × 2.5 = 2.25%. Abnormal return 1.4 − 2.25 = −0.85%.
- 1.4−(0.9×2.5)= -0.85
- 1.4ENTER0.9ENTER2.5×− -0.85
ENTER enter (on the HP, puts the number on the stack)
How it is asked
-
Which form is violated?
An investor earns abnormal returns trading on public filings of directors' share purchases.
Public information: semi-strong is violated. Trap: strong form, which needs private information. A moving-average rule (past prices) would violate the weak form, and so the other two.
-
Insiders
A board member earns abnormal returns trading before an announcement.
Private information: only the strong form is violated.
-
Event-study calculation
Market −2.0%, beta 0.8, share −0.5%. Abnormal return?
Expected 0.8 × (−2.0) = −1.6%. AR = −0.5 − (−1.6) = +1.10%. Trap: +1.50% ignores beta.
-
Nesting
If a market is semi-strong efficient, it is also…?
Weak-form efficient. Past market data are part of public information.
Exam traps
- Thinking weak-form efficiency rules out fundamental analysis. It rules out only strategies based on past market data.
- Forgetting the nesting: a semi-strong efficient market is automatically weak-form efficient, not the other way round.
- Computing the abnormal return as the share's return minus the market's return. Use beta unless the stem says beta is 1.
- Choosing strong form whenever abnormal returns appear. Match the information to the form: past market data, weak. Public, semi-strong. Private, strong.
Checkpoint
4 exam-style questions. About 90 seconds each.
1An investor consistently earns abnormal returns by buying shares the day after company directors buy them, using the public filing that reports the trades. This most likely contradicts:
2On the day a company announces results, the market falls 2.0%. The company's beta is 0.8 and its shares fall 0.5%. The abnormal return is closest to:
3If a market is semi-strong-form efficient, it is most likely also:
4Studies find that corporate insiders earn abnormal returns on their share trades, while investors trading on public announcements do not. The market is most likely:
Key takeaways
- Weak: past market data. Semi-strong: all public information. Strong: all information.
- The forms are nested: strong contains semi-strong contains weak.
- Event studies test semi-strong efficiency with abnormal returns around news.
- Developed markets look weak and semi-strong efficient. No market is strong-form efficient.
Quick example
The market returns 2.5% on an announcement day. A share with beta 0.9 returns 1.4%. Expected 0.9 × 2.5 = 2.25%. Abnormal return 1.4 − 2.25 = −0.85%.
- 1.4−(0.9×2.5)= -0.85
- 1.4ENTER0.9ENTER2.5×− -0.85
ENTER enter (on the HP, puts the number on the stack)
Questions about this lesson?
Where this comes back
- What efficiency means for analysts and for active vs passive investing Market Efficiency
- Market anomalies: calendar, momentum, size, value and more Market Efficiency
Questions candidates ask
What is the difference between weak, semi-strong and strong-form efficiency?
They differ in what prices already reflect: past market data (weak), all public information (semi-strong), or all public and private information (strong).
How is semi-strong efficiency tested?
With event studies. If prices adjust quickly and fully at the announcement and do not drift afterward, the market is consistent with semi-strong efficiency.
Are markets strong-form efficient?
No. Insiders can earn abnormal returns, which is why trading on material non-public information is prohibited.
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