Question

A radio advertisement states that gasoline prices in the United

States rise every summer and fall every winter so that there is money

to be made from buying gasoline futures in the winter and holding them

until summer. (A future is a financial instrument that promises delivery of

a commodity or the equivalent of its market price at a future date.) Is

the underlying reasoning consistent with the efficient-markets hypothesis?

Explain.

Answer 1

The reasoning becomes inconsistent with the efficient market hypothesis, because as per semi-strong form of market hypothesis, the market absorbs all the public information such as radio advertisements mentioned and reflect it already in the price. So, scope of arbitrage is eliminated and market already increases the price in a way that people now cannot benefit themselves after the radio advertisements spread to everyone in the market.

If everyone now started buying futures in the winter, then demand of futures increases and its price increases (though before the advertisement, it was low). Further, when everyone starts selling in the summer, then price decreases due to increase in supply of futures. Now, the price becomes equal in both the seasons and arbitrage opportunity is eliminated due to the market efficiency.