Efficient markets theory

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Efficient markets theory (EMT)

Principle that all assets are correctly priced by the market, and that there are no bargains.

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 ?
VIENNA, Austria, October 7 /PRNewswire/ -- At INQUIRE Europe's Autumn 2005 conference in Vienna this week, leading academics from Europe and the United States delighted fund managers brought up on Efficient Markets Theory with the news that stock, hedge fund and other returns could be predicted, even if it meant replacing the Capital Asset Pricing Model.
stock market, the dividend-price ratio has never predicted dividend growth in accordance with the simple efficient markets theory.
Over this entire range, there is a distinct negative slope to the curve as the efficient markets theory would predict: Firms with lower dividend-price ratios did indeed have higher subsequent dividend growth, offering some evidence for micro-efficiency.
For readers familiar with the Efficient Markets Theory, a prediction market is actually an "efficient" market in the "strong form" of the theory.
However, what new theory would take its place is not clear (it may be that just a minor alteration in the efficient markets theory is needed).
Part Four is an attack on the efficient markets theory.
At least some mention of the efficient markets theory should be offered.
Then the semi-strong version of efficient markets theory would argue that if one investor, or a set of investment experts can sense a mood, and the costs of "sensing" are low, then other competitive investors must be able to sense a mood as well; therefore, abnormal returns would be non-existent.

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