Efficient Market Hypothesis Things to Know

1. Efficient Market Hypothesis
*EMH*
MG 08

2. INTRODUCTION
What is Efficient Market Hypothesis?
The Efficient Market Hypothesis (EMH) is a hypothesis
in financial economics that states the asset prices
reflect all available information. In other words, the
market quickly and correctly adjusts to new
information. Therefore, in an efficient market, prices
immediately and fully reflect available information.
Market efficiency was developed in 1970 by economist,
Eugene Fama. He later won the Nobel Prize for his
efforts.

3. TYPES OF EFFICIENT MARKET
HYPOTHESIS
The Efficient Markets Hypothesis (EMH) consists of
three progressively stronger forms:
 Weak Form
 Semi-strong Form
 Strong Form

4. TYPES OF EFFICIENT
MARKET HYPOTHESIS
Strong
Form
Semi Form
Weak Form
Private
Information
Public
Information
Past
Price

5. GRAPHICAL
REPRESENTATION OF
EMH
1. In this diagram, the circles
represent the amount of
information that each form of
the EMH includes.
2. Note that the weak form
covers the least amount of
information, and the strong
form covers all information.
3. Also note that each successive
form includes the previous
ones.
Weak
Form
Semi - Strong
Strong Form
All historical prices and returns
All Public Information
All Information, Public and Private

6. Assumptions
For the capital market efficiency theory to operate, the following
assumptions are made
1. Information is free and quick to flow.
2. All investors have the same access to information.
3. Transaction costs, taxes and any bottlenecks are not there and not hampering the
free forces of market.
4. Investors are rational and behave in a cost effective competitive manner for
optimization of returns.
5. Every investor has access to lending and borrowing at the same rate.
6. Market absorbs the information quickly and the market responds to new
technology, new trends, changes in tastes, and habits of consumers etc.,
efficiently and quickly.

7. THE STRONG FORM
1. The strong form says that prices fully
2. reflect all information, whether
publicly available or not.
3. Even the knowledge of material, non
public information cannot be used to
earn superior results.
4. Most studies have found that the
markets are not efficient in this sense.

8. THE SEMI STRONG FORM
1. The semi-strong form says that prices fully reflect
all publicly available information and
expectations about the future.
2. This suggests that prices adjust very rapidly to
new information, and that old information
cannot be used to earn superior returns.
3. The semi-strong form, if correct, repudiates
fundamental analysis.
4. Most studies find that the markets are
reasonably efficient in this sense, but the
evidence is somewhat mixed.

9. THE WEAK FORM
1. The weak form of the EMH says that past prices,
volume, and other market statistics provide no
information that can be used to predict future
prices.
2. Price changes should be random because it is
information that drives these changes, and
information arrives randomly.
Prices should change very quickly and to the
correct level when new information arrives.
3. Most research supports the notion that the
markets are weak form efficient.

10. SIX LESSONS FOR MARKET
EFFICIENCY
1. Markets Have No Memory.
2. Trust Market Prices.
3. Read The Entrails.
4. There Are No Financial Illusions.
5. Do-It-Yourself Alternative.
6. Seen One Stock, Seen Them All.

11. CONCLUSION
Weak form is supported, so technical analysis cannot
consistently outperform the market. Semi-strong form
is mostly supported, so fundamental analysis cannot
consistently outperform the market. Strong form is
generally not supported.
Ultimately, most believe that the market is very
efficient, though not perfectly efficient. It is unlikely
that any system of analysis could consistently and
significantly beat the market (adjusted for costs and
risk) over the long run.

12. *THANK YOU*
MG 08