Stats: Determining significance level in problem

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Discussion Overview

The discussion revolves around the significance level in relation to the strong form of the efficient market hypothesis (EMH) in finance. Participants explore the implications of a study indicating that only 8% of stock price movements can be accounted for by this hypothesis, questioning the appropriateness of various significance levels in this context.

Discussion Character

  • Debate/contested
  • Homework-related
  • Conceptual clarification

Main Points Raised

  • One participant questions the validity of the significance level being 50%, suggesting it seems excessively high compared to the typical levels of 5%, 1%, or 10%.
  • Another participant expresses skepticism about the question's meaningfulness, implying that a vague response like "what if it's even?" is inadequate.
  • A participant summarizes the issue, reiterating the 50% significance level while questioning why it isn't 5% given the study's findings.
  • One participant argues that if the strong market hypothesis claims 100% of stocks should show price movements accounted for, then the observed 8% suggests the hypothesis may be incorrect, raising questions about the relevance of significance levels.
  • A later reply introduces the Joint Hypothesis Problem, stating that without a correct model of what constitutes 'efficient' values, it is unclear whether violations indicate flaws in the EMH or the model used for testing.
  • Another participant clarifies that the question is more about significance testing than the EMH itself, suggesting it is poorly constructed and belongs in a homework context.

Areas of Agreement / Disagreement

Participants express differing views on the appropriateness of the significance level and the validity of the strong form of the EMH. There is no consensus on the question's meaningfulness or the implications of the study's findings.

Contextual Notes

Participants highlight potential confusion regarding the relationship between the EMH and significance testing, as well as the implications of the Joint Hypothesis Problem on the validity of the hypothesis being tested.

physicslady123
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TL;DR
The answer is 50% but why isn't it 5%?
Question:
In finance, the strong form of the efficient market hypothesis states that studying financial information about stocks is a waste of time since all public and private information that might affect the stock price is already reflected in the price of the stock. However, a study of 450 stocks found that only about 8% had price movements that could be accounted for in this way. At what significance level could you accept the strong form of the efficient-market hypothesis?

I know that significance levels are usually 5%, 1%, or 10% (as confidence levels are 95%, 99%, and 90%). So, why is the answer 50%? Isn't this too large of a significance level?
 
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I don't think the question has a meaningful answer.
Giving up and saying "what if it's even?" might be an answer but I don't think it is a good one.
 
physicslady123 said:
Summary:: The answer is 50% but why isn't it 5%?

However, a study of 450 stocks found that only about 8% had price movements that could be accounted for in this way.
Hint: what is the p-value of this data set?
 
I'm confused by the question too. If the strong market hypothesis is that 100% of stocks should "have price movements that could be accounted for this way", and only 8% of them do, isn't it just wrong? Where does a significance level even come into play here?
 
You have a more fundamental issue - the Joint Hypothesis Problem. Who is to say that your model is correct? To test the EMH you need a model of what ‘efficient’ values should be. However if you find violations of this model, to whatever significance level you choose, you don't know whether the EMH or your model is incorrect.

however, nobody believes the strong form of the EMH, which states that stock prices reflect even non-public information. If that was true, no one could make an economic profit trading on insider information
 
I think there is some confusion that this is a question about the Efficient Market Hypothesis; it isn't, it is a (rather poorly constructed) question on significance testing and it belongs in the homework section.
 
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