Efficient Market Hypothesis

Topics: Financial markets, Efficient-market hypothesis, Fundamental analysis Pages: 4 (1629 words) Published: April 13, 2008
Efficient Market Hypothesis
When establishing financial prices, the market is usually deemed to be well-versed and clever. In a stock market, stocks are based on the information given and should be priced at the accurate level. In the past, this was supposed to be guaranteed by the accessibility of sufficient information from investors. However, as new information is given the prices would shift. “Free markets, so the hypothesis goes, could only be inefficient if investors ignored price sensitive data. Whoever used this data could make large profits and the market would readjust becoming efficient once again” (McMinn, 2007, ¶ 1). This paper will identify the different forms of EMH, sources supporting and refuting the EMH and finally evaluating if the EMH applies to mergers. Three forms of the Efficient Market Hypothesis Eugene Fama coined the term, efficient market hypothesis (EMH) in the 1960s. There are three forms of the efficient market hypothesis: the weak, semi-strong and the strong form. The weak form of the EMH states that the past price and volume is indicated by current asset prices. The current market price of security is revealed by the information controlled by previous series of prices. “It is named weak form because the security prices are the most publicly and easily accessible pieces of information. It implies that no one should be able to outperform the market using something that "everybody else knows" (Han, 2008, ¶ 6). The semi-strong form of EMH states that all information that is made publicly accessible is included in the asset prices. Public information is not limited to past prices. Financial statements, economic factors and other data is included. This form of EMH suggests that just because everyone may have the same information, this does not give organizations access to surpass the market. The last form of the EMH is the strong form and it suggests that “private information or insider information...
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