efficientmarket

Efficient market, in financial economics, refers to the idea that asset prices reflect all available information. The Efficient Market Hypothesis (EMH) formalizes this claim, suggesting that it is impossible to consistently outperform the market on a risk-adjusted basis by exploiting mispricings. The concept is closely associated with Eugene Fama, who popularized it in the 1970s, and it has influenced theories of pricing, portfolio management, and market regulation.

Forms and definitions: The weak form holds that prices already reflect all past trading information, including price and volume data. The semi-strong form asserts that prices reflect all publicly available information, meaning new public news should be quickly incorporated into prices. The strong form extends this to all information, public and private, implying that even insiders could not earn abnormal returns; this version is generally regarded as too strong for real markets.

Evidence and implications: In many developed markets, empirical studies find limited ability for active management to consistently beat a low-cost benchmark after fees, supporting passive investing. However, several well-documented anomalies—such as momentum, the value effect, and post-earnings announcement drift—challenge strict forms of EMH. Proponents emphasize information frictions and timely pricing, while critics cite behavioral biases and limits to arbitrage.

Criticism and status: EMH remains a foundational framework in finance, guiding asset pricing models and regulatory thinking, even as it is debated. Its applicability varies by market, timeframe, and information environment, with efficiency higher for liquid, well-covered assets and lower in less transparent markets. The discourse has contributed to the rise of index funds and the use of algorithmic trading in modern markets.