{"id":349,"date":"2017-02-08T11:12:20","date_gmt":"2017-02-08T11:12:20","guid":{"rendered":"https:\/\/www.andlil.com\/en\/?p=349"},"modified":"2026-05-31T15:13:34","modified_gmt":"2026-05-31T15:13:34","slug":"efficient-market","status":"publish","type":"post","link":"https:\/\/www.andlil.com\/en\/efficient-market\/","title":{"rendered":"The Efficient-Market Hypothesis Explained"},"content":{"rendered":"<h2>What is an efficient market?<\/h2>\n<p>The efficient-market hypothesis was developed by Eugene Fama between the 1950s and 1960s. This hypothesis assumes that when a market is sufficiently developed, and that the information in that market is known by all the players, who are all rational, it will react almost instantly and properly.<\/p>\n<h2>Interpretation of the efficient market hypothesis<\/h2>\n<p>This theory infers that if the market is efficient, no investor could manage to obtain an abnormal profit on the market for a certain given level of risk. In the long term, \"beating the market\" is therefore impossible. The price of an asset is therefore equal to its theoretical value. Therefore, over or under valuation of assets is impossible in an efficient market.<\/p>\n<h2>Forms of market efficiency<\/h2>\n<p>Throughout his research, Fama identifies 3 forms of efficiency, classified according to the players\u2019 capacity to obtain market information.<\/p>\n<ul>\n<li>\n<h3>\u201cWeak form\u201d efficiency<\/h3>\n<\/li>\n<\/ul>\n<p>With weak-form market efficiency, the only explicable variable of the current or future price of an asset is that asset\u2019s price history. So we can\u2019t use the asset\u2019s past performance to predict its future price. Graphical analysis is therefore useless to make a profit. If all of the historical information has already been taken into account by the asset\u2019s going price, it is then useless to reuse this information to forecast its future variation.<\/p>\n<ul>\n<li>\n<h3>\u201cSemi-strong\u201d form efficiency<\/h3>\n<\/li>\n<\/ul>\n<p>This form of efficiency implies that any public information (mergers, <strong><u>dividend<\/u><\/strong> announcements, redundancies, annual results, etc.) is incorporated in the overall information. The semi-strong efficiency hypothesis can be confirmed, when the price of an asset fluctuates immediately following a public information announcement. In this type of market, it is pointless to forecast based on information that has already been published, no matter how recently, because it is already taken into account in the asset\u2019s price.<\/p>\n<ul>\n<li>\n<h3>\u201cStrong- form\u201d efficiency<\/h3>\n<\/li>\n<\/ul>\n<p>In a strong-form efficiency market, in addition to the fact that all the information of the other two forms are incorporated in the asset\u2019s current price (public information and the asset\u2019s past performance), all private information is known by all the players and is therefore also incorporated in the asset\u2019s price. <strong><u>Insider dealing <\/u><\/strong>therefore becomes impossible. With strong-form efficiency it is not possible to make a profit because it is impossible to predict the future.<\/p>\n<h2>Quote from Eugene Fama on efficient markets<\/h2>\n<p><em>\u201cA market in which prices always \u2018fully reflect\u2019 all available information is called \u2018efficient\u2019.\u201d<\/em><\/p>\n<p><em>\u00a0<strong>Eug\u00e8ne Fama<\/strong><\/em><\/p>\n<div id=\"attachment_350\" style=\"width: 310px\" class=\"wp-caption aligncenter\"><a href=\"https:\/\/www.andlil.com\/en\/\/wp-content\/uploads\/2017\/02\/Eugene-Fama-Efficient-Market.png\"><img loading=\"lazy\" decoding=\"async\" aria-describedby=\"caption-attachment-350\" class=\"size-medium wp-image-350\" src=\"https:\/\/www.andlil.com\/en\/\/wp-content\/uploads\/2017\/02\/Eugene-Fama-Efficient-Market-300x210.png\" alt=\"\" width=\"300\" height=\"210\" srcset=\"https:\/\/www.andlil.com\/en\/wp-content\/uploads\/2017\/02\/Eugene-Fama-Efficient-Market-300x210.png 300w, https:\/\/www.andlil.com\/en\/wp-content\/uploads\/2017\/02\/Eugene-Fama-Efficient-Market.png 586w\" sizes=\"auto, (max-width: 300px) 100vw, 300px\" \/><\/a><p id=\"caption-attachment-350\" class=\"wp-caption-text\">Eugene Fama - Efficient-Market<\/p><\/div>\n<p><em>\u00a0<\/em><\/p>\n<p>&nbsp;<\/p>\n","protected":false},"excerpt":{"rendered":"<p>What is an efficient market? The efficient-market hypothesis was developed by Eugene Fama between the 1950s and 1960s. This hypothesis assumes that when a market is sufficiently developed, and that the information in that market is known by all the players, who are all rational, it will react almost instantly and properly. Interpretation of the [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":350,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[38],"tags":[],"class_list":["post-349","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-great-economists"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.8 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>The Efficient-Market Hypothesis Explained<\/title>\n<meta name=\"description\" content=\"Understand Eugene Fama&#039;s efficient-market hypothesis. 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