Framework
Efficient market hypothesis
The question it answers
When an investor is deciding whether to pick shares or buy an index fund, how much information do prices already hold, and can analysis beat the market?
- Origin
- Fama (1970); paradox in Grossman and Stiglitz (1980); fund evidence in Jensen (1968)
- Diagram type
- Comparison table
- Level of analysis
- Industry
- Topics
- Corporate finance
Diagram
Efficient market hypothesis
| Criterion | Weak | Semi-strong | Strong |
|---|---|---|---|
| Prices reflect | Past prices | All public information | All information |
| What cannot win | Technical analysis | Fundamental analysis on public data | Insiders |
| Main challenge | Anomalies | Information costs | Cost of gathering information |
Sources
References
Listed A–Z by author surname, Harvard style. A source with a DOI links to https://doi.org/…; one without links to its page or says plainly that it has no DOI.
- Fama, E.F. (1970) ‘Efficient capital markets: a review of theory and empirical work’, Journal of Finance, 25(2), pp. 383–417.doi:10.2307/2325486Source page
- Grossman, S.J. and Stiglitz, J.E. (1980) ‘On the impossibility of informationally efficient markets’, American Economic Review, 70(3), pp. 393–408.No DOISource page
- Jensen, M.C. (1968) ‘The performance of mutual funds in the period 1945–1964’, Journal of Finance, 23(2), pp. 389–416.doi:10.1111/j.1540-6261.1968.tb00815.xSource page