According to the EMH, stocks always trade at their fair value on stock exchanges, making it impossible for investors to either purchase undervalued stocks or sell stocks for inflated prices. As such, it should be impossible to outperform the overall market through expert stock selection or market timing, and that the only way an investor can possibly obtain higher returns is by purchasing riskier investments.

2. 1. Md. Baitur Redouan Shakil
2. Tasnuva Tabassum
3. Musfiqur Rahman
4. Mehedi Hasan

3. According to the EMH, stocks always trade at
their fair value on stock exchanges, making it
impossible for investors to either purchase
undervalued stocks or sell stocks for inflated
prices. As such, it should be impossible to
outperform the overall market through expert
stock selection or market timing, and that the
only way an investor can possibly obtain higher
returns is by purchasing riskier investments.

4. The following are the main assumptions for a market to be
efficient:
A large number of investors analyze and value securities
for profit.
New information comes to the market independent from
other news and in a random fashion.
Stock prices adjust quickly to new information.
Stock prices should reflect all available information.
Financial theories are subjective. In other words, there
are no proven laws in finance, but rather ideas that try
to explain how the market works.

5. There are three major versions of the hypothesis:
weak; semi-strong, and strong. The weak form of
the EMH claims that prices on traded assets (e.g.,
stocks, bonds, or property) already reflect all past
publicly available information. The semi-strong form
of the EMH claims both that prices reflect all
publicly available information and that prices
instantly change to reflect new public information.
The strong form of the EMH additionally claims that
prices instantly reflect even hidden or insider
information. Critics have blamed the belief in
rational markets for much of the late-2000s financial
crisis.

6. The joint hypothesis problem says that it is
never possible to test (sufficiently, to prove
or disprove) market efficiency. A test of
market efficiency must include some model
for how prices may be set efficiently. Then
actual prices can be examined to see
whether this holds true.

7. Possible origins
The random character of stock market prices was
first modeled in 1863 by Jules Regnault, a French
broker. Later, it was modeled in 1900 by a French
mathematician, Louis Bachelier, in his 1900 PhD
thesis, The Theory of Speculation. His work was
largely ignored until the 1950s. A small number of
studies indicated that US stock prices and related
financial series followed a random walk model
Research by Alfred Cowles in the ’30s and ’40s
suggested that professional investors were in
general unable to outperform the market.

8. Initial formulation
The efficient-market hypothesis was developed
by Professor Eugene Fama at the University of
Chicago Booth School of Business as an
academic concept of study through his
published Ph.D. thesis in the early 1960s. It was
widely accepted up until the 1990s, when
behavioral finance economists, who had been a
fringe element, became mainstream

9. Impacts
The efficient-market hypothesis emerged as a
prominent theory in the mid-1960s. Paul
Samuelson had begun to circulate Bachelie’s work
among economists. In 1965, Eugene Fama
published his dissertation arguing for the random
walk hypothesis. In 1970, Fama published a review
of both the theory and the evidence for the
hypothesis. The paper extended and refined the
theory, included the definitions for three forms of
financial market efficiency: weak, semi-strong and
strong.

10. Theoretical background
Beyond the normal utility maximizing agents,
the efficient-market hypothesis requires that
agents have rational expectations; that on
average the population are correct (even if no
one person is) and whenever new relevant
information appears, the agents update their
expectations appropriately. Note that it is not
required that the agents be rational.

11. There are three common forms in which the
efficient-market hypothesis is commonly
stated—
1. Weak-form efficiency,
2. Semi-strong- form efficiency and
3. Strong-form efficiency
each of which has different implications for how
markets work.

12. In weak-form efficiency, future prices cannot be
predicted by analyzing prices from the past.
Excess returns cannot be earned in the long run
by using investment strategies based on
historical share prices or other historical data.
Technical analysis techniques will not be able to
consistently produce excess returns, though
some forms of fundamental analysis may still
provide excess returns.

13. Share prices exhibit no serial dependencies,
meaning that there are no patterns to asset
prices. This implies that future price movements
are determined entirely by information not
contained in the price series. Hence, prices
must follow a random walk. This soft EMH does
not require that prices remain at or near
equilibrium, but only that market participants not
be able to systematically profit from market
inefficiencies.

14. There is a vast literature in academic finance dealing with
the momentum effect identified by Jegadeesh and Titman.
Stocks that have performed relatively well (poorly) over the
past 3 to 12 months continue to do well (poorly) over the
next 3 to 12 months. The momentum strategy is long
recent winners and shorts recent losers, and produces
positive risk-adjusted average returns. A novel approach
for testing the weak form of the Efficient Market
Hypothesis is using quantifers derived from Information
Theory. In this line, Zunino et al.[30] found that
informational efficiency is related to market size and the
stage of development of the economy. Using a similar
technique, Bariviera et al. uncover the impact of important
economic events on informational efficiency.

15. In semi-strong- form efficiency, it is implied that
share prices adjust to publicly available new
information very rapidly and in an unbiased
fashion, such that no excess returns can be
earned by trading on that information. Semi-
strong- form efficiency implies that neither
fundamental analysis nor technical analysis
techniques will be able to reliably produce
excess returns.

16. To test for semi-strong-form efficiency, the
adjustments to previously unknown news must
be of a reasonable size and must be
instantaneous. To test for this, consistent
upward or downward adjustments after the
initial change must be looked for. If there are
any such adjustments it would suggest that
investors had interpreted the information in a
biased fashion and hence in an inefficient
manner.

17. In strong-form efficiency, share prices reflect all
information, public and private, and no one can
earn excess returns. If there are legal barriers
to private information becoming public, as with
insider trading laws, strong-form efficiency is
impossible, except in the case where the laws
are universally ignored. To test for strong-form
efficiency, a market needs to exist where
investors cannot consistently earn excess
returns over a long period of time.

18.  Even if some money managers are
consistently observed to beat the market, no
refutation even of strong-form efficiency
follows: with hundreds of thousands of fund
managers worldwide, even a normal
distribution of returns (as efficiency predicts)
should be expected to produce a few dozen
star performers.