Efficient Market Hypothesis (EMH)
A framework about information and prices, with evidence and implications that depend on the market, period, costs, and test design.
Market efficiency describes how prices incorporate information. The Efficient Market Hypothesis has weak, semi-strong, and strong forms, but empirical tests are joint tests of efficiency and an assumed asset-pricing model, so results do not provide a simple proof that markets are perfectly efficient or predictably exploitable.
Frequently Asked Questions
Does EMH say prices are always correct?
No. Efficiency concerns whether available information can be used to earn abnormal returns after risk and costs, not whether prices equal a single true value at every moment.
Does EMH prove active management cannot outperform?
No. Some managers may outperform, but distinguishing skill from luck is difficult, persistence is uncertain, and fees, taxes, capacity, and benchmark choice affect net results.
Do anomalies disprove market efficiency?
Not automatically. Apparent anomalies may reflect risk, data mining, implementation costs, changing definitions, publication bias, or model misspecification, and many weaken after discovery.
Does market efficiency imply everyone should buy an index fund?
No single strategy follows mechanically. Indexing may be appropriate for many investors, but objectives, liabilities, taxes, constraints, values, risk capacity, and market access differ.