West Loop Financial LLCThe Efficient Market Hypothesis, Fact Or Fiction? Part 1 – West Loop Financial LLC https://www.westloopfinancial.com Evolutionize Site Wed, 19 Aug 2020 20:50:49 +0000 en-US hourly 1 https://wordpress.org/?v=5.1.22 The Efficient Market Hypothesis, Fact Or Fiction? Part 1 https://www.westloopfinancial.com/2014/04/30/the-efficient-market-hypothesis-fact-or-fiction-part-1/ https://www.westloopfinancial.com/2014/04/30/the-efficient-market-hypothesis-fact-or-fiction-part-1/#respond Wed, 30 Apr 2014 16:17:09 +0000 http://evolvemypractice.com/?p=860 Today begins a four-part series on the efficient market hypothesis. We’ll begin with a brief history and explanation of the EMH. Eugene Fama, recent recipient of the Nobel Prize in economics, is considered the father of the efficient-market hypothesis (EMH). The EMH asserts that financial markets are “informationally efficient.” As a consequence, we would expect...

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]]> Today begins a four-part series on the efficient market hypothesis. We’ll begin with a brief history and explanation of the EMH. Eugene Fama, recent recipient of the Nobel Prize in economics, is considered the father of the efficient-market hypothesis (EMH). The EMH asserts that financial markets are “informationally efficient.” As a consequence, we would expect that there would be no persistence of risk-adjusted outperformance by active managers beyond what would be randomly expected.

There are three major versions of the EMH. The weak form hypothesizes that prices on stocks and bonds reflect all publicly available information. That would render technical analysis inefficient as a means of forecasting price movements – it’s not possible to outperform based on analysis of past prices. The semi-strong form of the EMH hypothesizes that prices both reflect all publicly available information and prices instantly change to reflect new public information – neither technical nor fundamental analysis should result in abnormal returns. The strong form of the EMH hypothesizes that prices reflect all information – even the use of insider information should not generate abnormal returns.

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