Efficient-Market Hypothesis (EMH) Law and Legal Definition
The Efficient-Market Hypothesis (EMH) asserts that one cannot consistently achieve returns in excess of average market returns on a risk-adjusted basis, given the information publicly available at the time the investment is made. Hypothesis is that financial markets are informationally efficient. The EMH theory was first expressed by Louis Bachelier, a French mathematician, in his 1900 dissertation, "The Theory of Speculation.”
There are three major versions of the hypothesis: "weak", "semi-strong", and "strong". Weak EMH claims that prices on traded assets (e.g., stocks, bonds, or property) already reflect all past publicly available information. Semi-strong EMH claims both that prices reflect all publicly available information and that prices instantly change to reflect new public information. Strong EMH additionally claims that prices instantly reflect even hidden or "insider" information. There is evidence for and against the weak and semi-strong EMHs, while there is powerful evidence against strong EMH.
Beyond the normal utility maximizing agents, the efficient-market hypothesis requires that agents have rational expectations; that on average the population is correct and whenever new relevant information appears, the agents update their expectations appropriately.
The validity of the hypothesis has been questioned by critics who blame the belief in rational markets for much of the financial crisis of 2007–2010. However, Defenders of the EMH caution that conflating market stability with the EMH is unwarranted; when publicly available information is unstable, the market can be just as unstable.
