Finding Alphas, 2nd Edition

18Equity Price and Volume

By Cong Li and and Huaiyu Zhou

INTRODUCTION

In finance, the efficient market hypothesis (EMH) asserts that financial markets are “information efficient.” That is, with the information available at the time that the investment is made, one cannot consistently achieve returns in excess of average market returns on a risk-adjusted basis.

There are three major versions of the EMH: the weak, the semistrong, and the strong. The weak hypothesis states that the prices of traded assets (for example, stocks, bonds, or property) already reflect all past available public information. The semistrong hypothesis argues that all past publicly available information and current public information already has been priced into securities. The strong hypothesis declares that all public and private information is reflected in a security's price. Thus, given only the current and historical price-volume data, the EMH implies that it is impossible to make a profit in an efficient market and that there are no such things as price-volume alphas.

Is this true? No, it is not. Although the development of information technology, information processing, and automatic trading, in addition to other advances have brought the market closer to full efficiency, full efficiency has not, and may never be, attained. Quantitative traders seek to profit from remaining inefficiencies. Price–volume alphas, relying only on the market data, continue to refute the EMH every day.

SEEKING PROFITS ...