Efficient market theory

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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.

Efficient market theory.

Proponents of the efficient market theory believe that a stock's current price accurately reflects what investors know about the stock.

They also maintain that you can't predict a stock's future price based on its past performance. Their conclusion, which is contested by other experts, is that it's not possible for an individual or institutional investor to outperform the market as a whole.

Index funds, which are designed to match, rather than beat, the performance of a particular market segment, are in part an outgrowth of efficient market theory.

References in periodicals archive ?
Efficient market theory contends that investors are unable to make an above normal profit based on information that is readily available to the public.
Thus, Fama makes operational Samuelson's martingale requirement for properly anticipated prices by showing that it is possible to reject the martingale property (and hence, market efficiency) by using only a subset of the information available to any (or for that matter, all) investors, As Fama makes clear in his development of the strong, semi-strong, and weak versions of the efficient market theory, it is also possible for speculative prices to satisfy the martingale conditions for one information set but not to satisfy it for another.
However, with the development in the late 1960s of large-scale stock return data bases (principally at the University of Chicago Center for Research in Security Prices) and the availability of high-speed computers, there came an avalanche of tests of the efficient market theory, which were neither limited to a few securities nor to short observation periods.
Although these efforts ran against the efficient market theory, Peter was very patient and encouraging.
Value Line continues to represent an important anomaly arguing against efficient market theory even after thirty years.

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