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Form of market efficiency

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A daytime trader has been bragging to his Foundations of Finance classmates that he has been making money consistently exploiting a little-known trick in the stock markets. When a stock opens 5% less than yesterday's closing price, he buys it in the morning. When a stock opens more that 5% higher compared to previous day's close, he short sells the stock. He reasons that markets over-react to bad as well as good news, and it corrects during the daytime. Hence, when the price goes down by more than 5% (could be due to bad news) it will recover some of the loss during the daytime. Similarly, when price goes up by more than 5% (could be due to good news) it will give up some of the gain during daytime. By the end of the day, he closes her position. Given that this strategy has been generating profits on a regular basis, what form of market efficiency does this market represent? What levels of market efficiency are violated?

Reference no: EM133062340

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