- It is based on the fact that markets are efficient and prices are independent of any movements in the markets.
- Prices are independent of previous prices and indicate random movements.
- A major change in the stock prices are only due to disequilibrium in the demand and supply.
Three forms of Efficient Market Hypothesis (EMH)
- Weak form EMH
- A market is considered efficient when the subsequent price is independent of previous prices.
- There is always a random walk and demand supply position affects prices.
- Technical analysis will not be beneficial to the investors in decision making – it directly rejects technical analysis.
- Semi-strong form EMH
- Asserts that the security prices reflect all public information.
- It includes market information as well as non-market information like economic data, industry statistics etc.
- Strong form EMH
- Security prices reflect all public information as well as private information.
- It assumes that no single group of investors has any access to information which enables it to earn greater risk adjusted returns.
- No insider will have any information which will give him an upper hand
April 15, 2022