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Efficient Market hypothesis- is the idea that the price of stocks and financial securities reflects all available information about them. If new information about a company becomes available, the price will quickly change to reflect this.
Many Buyers and sellers
Agents have rational expectations and on average make good decisions about buying shares / stocks
Perfect information about market trends and profit of firms.
Thanks Sir for giving me opportunity, assumption of EMH is that buyers and consumers have complete information of all the market factors such as prices,prices trends,inflation rate,dividend rates,interest rates,rates and prices of alternatives,supply,demand,etc. But in such market general and simple sellers like farmers and simple nationals who used to dont have knowledge of all market factors used to sell their goods, hard services,products and securities for least minimum prices and accordingly and consicutively inflation and deflation cycles used to get offset.etc ,
IN FINANCE, the efficient-market hypothesis (EMH) asserts that financial markets are "information-wise efficient". In consequence of this, one cannot consistently achieve returns in excess of average market returns on a risk adjusted basis, given the information available at the time the investment is made.
There are three major versions of the hypothesis: "weak", "semi-strong", and "strong". The weak form of the EMH claims that prices on traded assets (e.g., stocks/bonds or property) already reflect all past publicly available information. The semi-strong form of the EMH claims both that prices reflect all publicly available information and that prices instantly change to reflect new public information. The strong form of the EMH additionally claims that prices instantly reflect even hidden or "insider" information. Critics have blamed the belief in rational markets for much of the late2000-financial crisis. In response, proponents of the hypothesis have stated that market efficiency does not mean having no uncertainty about the future, that market efficiency is a simplification of the world which may not always hold true, and that the market is practically efficient for investment purposes for most individuals.
Dear Venkitaraman Krishna Moorthy Vrindavan
Thanks for your invitation, as I am seeing that enough is already told, but I want to put some excerpts from a worthwhile article from The Efficient Markets Hypothesis written by Jonathan Clarke, Tomas Jandik, Gershon Mandelker. I will suggest all to read this.
COMMON MISCONCEPTIONS ABOUT THE EMH
EMH has received a lot of attention since its inception. Despite its relative simplicity, this hypothesis has also generated a lot of controversy. A fter all, the EMH questions the ability of investors to consistently detect mis-priced securities. Not surprisingly, this implication does not sit very well with many financial analysts and active portfolio managers.Arguably, in liquid markets with many participants, such as stock markets, prices should adjust quickly to new information in an unbiased manner. However, much of the criticism leveled at the EMH is based on numerous misconceptions, incorrect interpretations, and myths about the theory of efficient markets. We present some of the most persistent “myths” about the EMH below.Myth1:EMH claims that investors cannot outperform the market. Yet we can see that some of the successful analysts (such as George Soros, Warren Buffett, or Peter Lynch) are able to do exactly that. Therefore, EMH must be incorrect.EMH does not imply that investors are unable to outperform the market. We know that the constant arrival of information makes prices fluctuate. It is possible for an investor to “make a killing” if newly released information causes the price of the security the investor owns to substantially increase. What EMH does claim, though, is that one should not be expected to outperform the market predictably or consistently.It should be noted, though, that some investors could outperform the market for a very long time by chance alone, even if markets are efficient. Imagine, for the sake of simplicity, that an investor who picks stocks “randomly” has a50% chance of “beating the market”. For such an investor, the chance of outperforming the market in each and every of the next ten years is then (0.5), or about one- tenth of one percent. However, the chance that there will be at least one investor outperforming the market in each of the next10 years sharply increases as the number of investors trying to do exactly that rises. In a group of1,000 investors, the probability of finding one “ultimate winner” with a perfect10-year record is63%. With a group of10,000 investors, the chance of seeing atleast one who outperforms the market in every of next ten years is99.99%, a virtual certainty. Each individual investor may have dismal odds of beating the market for the next10 years. Yet the likelihood of, after the ten years, finding one very successful investor, even if he or she is investing purely randomly – is very high if there are a sufficiently large number of investors. This is the case with the state lottery, in which the probability of a given individual winning is virtually zero, but the probability that someone will win is very high. The existence of a handful of successful investors such as Messrs. Soros, Buffett, and Lynch is an expected outcome in a completely random distribution of investors. The theory would only be threatened if you could identify who those successful investors would be prior to their performance, rather than after the fact.
- A large number of investors, so no individual investor can affect the market.
- New information comes to the market quickly and all investors have access to these information
- Stock prices adjust quickly to new information
- Stock prices should reflect all available information
