What is the efficient market hypothesis?

@mandy 

The Efficient Market Hypothesis (EMH) is an economic theory that states that financial markets are efficient, meaning that the prices of financial assets (such as stocks, bonds, and commodities) fully reflect all available information. It suggests that it is impossible to consistently achieve above-average returns through active trading or by using information that is already publicly known. According to this hypothesis, market participants have rational expectations and any new information is immediately incorporated into asset prices, making it difficult to consistently outperform the market. EMH has three main forms: Weak, Semi-Strong, and Strong, each defining the level of information reflected in asset prices.

@mandy 

• The Weak form of EMH posits that all past price and volume information is already reflected in current prices, and therefore, it is impossible to predict future price movements by analyzing historical data.
• The Semi-Strong form suggests that in addition to past price and volume information, all publicly available information is already incorporated into asset prices. This means that fundamental analysis or studying publicly available information like financial statements or news headlines cannot consistently generate abnormal returns.
• The Strong form of EMH asserts that all information, whether it is publicly available or private, is already reflected in asset prices. This implies that even insider trading cannot consistently generate abnormal returns since markets quickly adjust to incorporate new information.

The Efficient Market Hypothesis has been subject to criticism and debate. Critics argue that there are instances where markets do not reflect all available information or are influenced by irrational behavior. However, the EMH remains a fundamental theory in finance and has implications for investors, particularly those who engage in active trading or rely on market timing strategies.