Efficient Market Hypothesis
Abstract
In search of the answer, if the markets are efficient, we discussed the three forms of market hypothesis and also the test results for each of them. The most relevant contribution came from the empirical evidence produced by Benz in 1981, where he observed that the smaller firms consistently achieved higher than risk adjusted indicating that markets are inefficient.
Efficient Market Hypothesis
Proposed by eminent finance professor Eugene Fama in 1970, Efficient Market Hypothesis has been identified and discussed under three forms of market efficiency and same are discussed below:
Weak Form Hypothesis
The weak form of the efficient market states that the current prices of the stocks contains all the information related to historical stock prices, trade volume and other market-generated information, hence the historical data will be of no use to forecast the future returns. In other words, the investor will gain little if stocks are purchased using the technical analysis.
Semi-Strong Form Hypothesis
The semi-strong form of the efficient market states that current security prices reflect the pubic(including non-market information). In other words, since the security prices rapidly adjust to any new public and non-market information without any bias, it is of no use for the investor to trade on any information after it is public as the security prices are already adjusted to such information.
Strong-Form Hypothesis
The strong-form of efficient market states that the current security prices reflect both public as well as private information. Hence no group of investors could have monopolistic have access to information that could assist them in deriving higher than risk-adjusted returns.
