Efficient Market Hypothesis

What is the Efficient Market Hypothesis?

In economic theory, an efficient market is one in which market prices adjust rapidly to reflect new information. The degree to which the market is efficient depends on the quality of information reflected in market prices. In an efficient market, profitable arbitrage opportunities do not exist and traders cannot expect to consistently outperform the market unless they have lower-cost access to information that is reflected in market prices or unless they have access to information before it is reflected in market prices. (Source: CFTC)

In finance, the efficient market hypothesis (EMH) asserts that financial markets are "efficient", or that prices on traded assets, e.g. stocks, bonds, or property, already reflect all known information and therefore are unbiased in the sense that they reflect the collective beliefs of all investors about future prospects. Professor Eugene Fama at the University of Chicago Graduate School of Business developed EMH as an academic concept of study through his published Ph.D. thesis in the early 1960s at the same school.

The efficient market hypothesis states that it is not possible to consistently outperform the market — appropriately adjusted for risk — by using any information that the market already knows, except through luck. Information or news in the EMH is defined as anything that may affect stock prices that is unknowable in the present and thus appears randomly in the future. This random information will be the cause of future stock price changes. (Source: Wikipedia)