Efficient market hypothesis (EMH)

Posted in Finance, Accounting and Economics Terms, Total Reads: 1392
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Definition: Efficient market hypothesis (EMH)

Efficient market hypothesis (EMH) states that the financial markets are efficient with respect to information. The price of any security is the expected net present value of all the future returns and cash flows and this value reflects all the information affecting the security. There is no information asymmetry and both the buyers and sellers adjust to the information to fix the price of the security to reflect its risk and return.It assumes accurate and timely incorporation of information. EMH has 3 forms:

Weak form of EMH: This relates to historical data. It says that the current prices of the securities fully reflect the historical prices and historical information available publically.

Semi-Strong: This states that the prices of securities fully reflect the publicly available information. Any new public information is incorporated fast enough to disable any investor to take any undue advantage.However, there is still scope for investors with internal information to make undue profits.

Strong form of EMH: It states that the prices of the securities fully reflect the public and private information. No investor has a superior ability to earn abnormal profits.

 

 

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