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 ?
(2007), "Efficient market hypothesis: empirical testing through random investing", The ICFAI Journal of Applied Finance, Vol.
The efficient market hypothesis keeps a relation with the random walk theory.
While there are critics of event studies and the efficient market hypothesis (Bannerjee, 1992; Bikhchandani et al., 1991), most scholars who have investigated the subject of market efficiency in detail provide evidence in support of the concept (Gilson and Kraakman, 2003; Malkiel, 2003).
According to the Efficient Market Hypothesis (EMH) such seasonal patterns should not persist since their existence implies the possibility of obtaining abnormal returns applying market-timing strategies.
In this fourth edition, Burton (economics, California State Polytechnic University) and Lombra (economics, Pennsylvania State University) provide greater coverage of technological change, the Federal Reserve, the securities industry, financial holding companies, and equity and debt markets, and a more detailed analysis of the efficient market hypothesis. This text is designed for introductory courses in money and banking as well as financial market analysis.
The key to comprehending the efficient market hypothesis is understanding the difference between a great company and a great stock.
The widespread assumption of the validity of the Efficient Market Hypothesis, that investors cannot outperform the market, creates a tempting basis for creating a predictable market performance model based on clues widely and promptly available.
2 job, a very close second, is to create portfolios that their clients are comfortable with." Our fifth man to honor is Eugene Fama, who still teaches at the University of Chicago, and also won the Nobel in Economic Sciences for his work on creating the efficient market hypothesis. Speaking last year, a former student and teaching assistant of Fama's, Cliff Asness of AQR Capital hedge fund fame, pointed out that despite their different takes on the efficiency of the market, "along with Jack Bogle, he's one of my investing heroes."
The efficient market hypothesis has lulled people into believing that financial markets are completely efficient and that investors do not overreact to events in a predictable and exploitable manner.
Efficient Market Hypothesis suggests that you cannot beat the market over time because information is widely available and any positives or negatives regarding a particular stock will already be built-in to the price.
The efficient market hypothesis is the idea has priced everything in, meaning there's no point in picking stocks, Mintzmyer said.
One of the most important concepts in financial economics is the Efficient Market Hypothesis (see the video: What is The Efficient Market Hypothesis - EMH).

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