The Efficient Market Hypothesis

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According to Lo (2007), the efficient markets hypothesis (EMH) maintains that market prices fully reflect all available information. It was developed independently by Paul A. Samuelson and Eugene F. Fama in the 1960s, this idea has been applied extensively to theoretical models and empirical studies of financial securities prices, generating considerable controversy as well as fundamental insights into the price-discovery process.

Ang (2011) stated that the early theoretical articulations of the Efficient Market Hypothesis (EMH) focused on arguments that future changes in security prices should be unpredictable. This proposition of the random walk hypothesis was supported by French stock broker Jules Regnault (1863), who proposed that the
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Rather, the EMH implies only that, “The market quotation … already contains in itself all that can be known about the future and in that sense has discounted future contingencies as much as humanly possible…” In short, futures prices should be unbiased, and that speculation should be a “fair game” with an expected reward of zero, or more generally, an amount that reflects a normal risk premium. Therefore, Samuelson (1965) concluded that in an informationally efficient market, price changes must be unforecastable if they are properly anticipated, that is, if they fully incorporate the information and expectations of all market participants.

Bode et al (2001) identified three forms of stock market efficiency hypothesis namely the weak, semi-strong and strong. These forms are differentiated by the amount of information incorporated in the share price formation processes determined by the “available information” and how information is disseminated throughout each respective market. In concurrence, Fama (1970) highlighted that efficiency can be more precisely defined with reference stock price adjustments to the information set available to market

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