The Speed of Adjustment of Prices to Private Information: Empirical Tests
14 Pages Posted: 23 May 2006
We estimate speeds of adjustment of individual stock prices to private information using daily data. We use a model in which private information gives rise to return variance and private information decays linearly over time. We find that, on average about 85 to 88 percent of private information is incorporated into prices within one trading day, with variation depending upon the stock's trading volume and whether the stock is listed on an exchange. The findings support strong form market efficiency.
Keywords: strong form efficiency, private information, speed of adjustment
JEL Classification: G10, G14
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