Market efficiency hypothesis - nonsense or reality?

by Carlos
3 Minuten
Market efficiency hypothesis - nonsense or reality?

The market efficiency hypothesis (or short EMH) is a theory that has been developed in the context of finance. In a few words, it states that in a perfect market, all information about an asset is already known and thus reflected in the price. The consequence of this is that no information participant can have an information advantage and therefore no chance to beat the market eventually. Price movements on supposed news are random and not caused by the information.

What is the truth of this theory? Some scientists have conducted empirical studies.

Types of the market efficiency hypothesis

The market efficiency hypothesis of Eugene Fama was divided into three variants.

Weak market efficiency hypothesis

This market efficiency hypothesis assumes that past price developments have already been considered in the current price. Thus, an analysis of the past, as it is common in technical analysis, does not bring any advantages. Future prices are therefore random.

Medium Strength Market Efficiency Hypothesis

In addition to the weak market efficiency hypothesis, there is also information from public reports: balance sheets, annual reports and the like. This would lead the fundamental analysis, which is based on this very information, to the point of absurdity.

Strict market efficiency hypothesis

In this approach to the market efficiency hypothesis, all other information is added, such as insider knowledge.

Empirical investigation of the market efficiency hypothesis

These three variants were investigated. The result is quite interesting.

Empirical investigation of the weak market efficiency hypothesis

This actually exists. So technical analyses seem to bring only a short-term advantage. Transaction costs, which quickly destroy potential profits, put a damper on the calculation.

Empirical investigation of the medium-strong market efficiency hypothesis

Here the information is a bit contradictory. Thus, the existence of the medium-strong market efficiency hypothesis can neither be confirmed nor denied.

Empirical investigation of the strict market efficiency hypothesis

The current state of science assumes that the strict market efficiency hypothesis does not correspond to the real world. Especially large information announcements lead to strong price jumps. Changes in interest rates, outbreak of wars and comparable categories make the market incalculable. If this information were already available in the markets beforehand, there would be only small or no price changes at all.

So what can you conclude from this, especially for your investment strategy?

One consequence of these remarks is that news portals, such as Samuelssons Rapport, which provides regular information about economic events and trading on the stock exchange in general, are quite justified. Short-term movements will hardly be useful with this news, the information is too old during publication. The longer the investment horizon, however, the greater the chances that the information is useful, even if it is not consumed immediately after publication.