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The efficient-market hypothesis (EMH) [a] is a hypothesis in financial economics that states that asset prices reflect all available information. A direct implication is that it is impossible to "beat the market" consistently on a risk-adjusted basis since market prices should only react to new information.
In the 1970s Eugene Fama defined an efficient financial market as "one in which prices always fully reflect available information". [3] Fama identified three levels of market efficiency: 1. Weak-form efficiency. Prices of the securities instantly and fully reflect all information of the past prices. This means future price movements cannot be ...
The random walk hypothesis may be derived from the weak-form efficient markets hypothesis, which is based on the assumption that market participants take full account of any information contained in past price movements (but not necessarily other public information).
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In an article in the May 1970 issue of the Journal of Finance, entitled "Efficient Capital Markets: A Review of Theory and Empirical Work", [14] Fama proposed two concepts that have been used on efficient markets ever since. First, Fama proposed three types of efficiency: (i) strong-form; (ii) semi-strong form; and (iii) weak efficiency.
The joint hypothesis problem is the problem that testing for market efficiency is difficult, or even impossible. Any attempts to test for market (in)efficiency must involve asset pricing models so that there are expected returns to compare to real returns. It is not possible to measure 'abnormal' returns without expected returns predicted by ...
The efficient market hypothesis posits that stock prices are a function of information and rational expectations, and that newly revealed information about a company's prospects is almost immediately reflected in the current stock price. This would imply that all publicly known information about a company, which obviously includes its price ...