Efficient Market Hypothesis


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Efficient Market Hypothesis

States that all relevant information is fully and immediately reflected in a security's market price, thereby assuming that an investor will obtain an equilibrium rate of return. In other words, an investor should not expect to earn an abnormal return (above the market return) through either technical analysis or fundamental analysis. Three forms of efficient market hypothesis exist: weak form (stock prices reflect all past information in prices), semistrong form (stock prices reflect all past and current publicly available information), and strong form (stock prices reflect all relevant information, including information not yet disclosed to the general public, such as insider information).

Efficient Market Theory

A controversial model on how markets work. It states that the market efficiently deals with all information on a given security and reflects it in the price immediately. The model holds that technical analysis, fundamental analysis, and any speculative investing based on them are useless. The model has three forms: weak efficiency, which holds that technical analysis is ineffective, semi-strong efficiency, which holds that fundamental analysis is ineffective, and strong efficiency, which states that even insider information is immediately reflected in the security prices. Investors and academics disagree on how well the model works.
References in periodicals archive ?
A measure of the independence of changes in prices or returns, which is the conventional approach using only historical asset prices, is necessary in order to statistically test the efficient market hypothesis.
When much of the iconic literature that guides our markets was written, information moved relatively slowly, as a review of the history of the efficient market hypothesis reminds us.
The implications of the efficient market hypothesis may be summarised in the following ways (Reilly & Brown, 2009):
In Defense of Fundamental Security Analysis: A Critique of the Efficient Market Hypothesis.
One of the followers of the efficient market hypothesis was Alan Greenspan, for many years the chairman of the U.
1) It is generally accepted that betting markets present a potentially useful context for examining the efficient market hypothesis (Law and Peel 2002).
2003), General Accounting Office (GAO) (2002), and Wu (2002) document negative abnormal stock returns of the restating firms in the months following the restatement announcement, which is contradictory to the efficient market hypothesis predicting no abnormal returns.
The study supports the efficient market hypothesis and shows that mutual fund do not outperform passive investing methods such as investing in the index stocks.
25 per share because, "[a]ccording to [the] efficient market hypothesis, a rational investor would conclude that Mr.
He touches on technical and fundamental analysis, the efficient market hypothesis, behavioral theories, game theory, risk and diversification, and chaos and complexity theory.
The reigning financial economics paradigm--the efficient market hypothesis (EMH)--assumes that individuals make rational investment decisions using the rules of probability and statistics.

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