What is: Efficient Market Hypothesis (EMH)

What is Efficient Market Hypothesis (EMH)

The Efficient Market Hypothesis (EMH) is a theory that suggests that financial markets are efficient and that asset prices reflect all available information. According to EMH, it is impossible to consistently outperform the market because all relevant information is already incorporated into stock prices.

Proponents of EMH argue that it is difficult, if not impossible, to beat the market consistently through stock picking or market timing. This is because any new information that could potentially impact stock prices is quickly and efficiently reflected in the market.

There are three forms of EMH: weak, semi-strong, and strong. The weak form suggests that all past prices and volume data are already reflected in current stock prices. The semi-strong form states that all publicly available information is already incorporated into stock prices. The strong form argues that all information, both public and private, is reflected in stock prices.

Critics of EMH argue that markets are not always efficient and that there are opportunities for investors to profit from mispricings. They point to anomalies such as the January effect and the existence of value and momentum strategies as evidence that markets are not always efficient.

Overall, the Efficient Market Hypothesis is a widely debated theory in the world of finance. While some believe that markets are efficient and that it is impossible to consistently beat the market, others argue that there are inefficiencies that can be exploited for profit.