Efficient Market Hypothesis

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Efficient Market Hypothesis

Efficient Market - Introduction

An efficient capital market is a market that is efficient in processing information

Assumptions for Market to be Efficient

In other words, the market quickly and correctly adjusts to new information
In an efficient market, the prices of securities observed at any time are based on “correct” evaluation of all information available at that time In an efficient market, prices immediately and fully reflect all available information

Large no. of investors analyze and value securities for profit
New information comes to the market in a random fashion


Stock Prices adjust quickly to the new information
Stock Prices should available information reflect all

"In an efficient market, competition among the many intelligent participants leads to a situation where, at any point in time, actual prices of individual securities already reflect the effects of information based both on events that have already occurred and on events which, as of now, the market expects to take place in the future. In other words, in an efficient market at any point in time the actual price of a security will be a good estimate of its intrinsic value.“

- Professor Eugene Fama

Efficient Market Hypothesis - Forms

Efficient Market Hypothesis

Weak Form

Semi-Strong Form

Strong Form

The EMH Graphically
All information, public & private

• In this diagram, the circles represent the amount of information that each form of the EMH includes • The weak form covers the least amount of information and the strong form all the information • Also note that each successive form includes the previous one

Strong Form


All public information

Weak Form

All historical prices & returns

Weak Form EMH
 

The weak form of the EMH says that past prices, volume, and other market statistics provide no…...

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