The Efficient Markets Hypothesis
The efficient markets hypothesis (EMH) says asset prices already reflect all available information, so prices move only on new, unpredictable news. A practical consequence is that prices follow a near random walk and consistently beating the market is very hard.
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Open full lesson page →Why it matters
If a profit opportunity were obvious from public information, traders would have already acted on it and moved the price. What is left to move prices is genuine surprise, which by definition cannot be predicted.
Under the EMH, a stock price changes mainly in response to
Worked examples
A company reports earnings exactly in line with expectations, yet its stock barely moves. Why?
The expected result was already in the price. Only the surprise versus expectations moves prices, and here there was no surprise.
Common mistakes
- ✗Efficient markets means prices are always right. It means prices reflect available information, not that they are free of errors or bubbles.
- ✗You can reliably beat the market by studying past prices. Under the weak form of EMH, past prices are already reflected, so technical patterns do not give a durable edge.
Revision bullets
- •Prices reflect all available information
- •Comes in weak, semi-strong, and strong forms
- •Only new, unpredictable news moves prices
- •Prices follow a near random walk
- •Consistently beating the market is hard
Quick check
Under the EMH, a stock price changes mainly in response to
Connected topics
Sources
- Mishkin (2018), Ch. 7Mishkin, F. S. The Economics of Money, Banking, and Financial Markets. 12th ed. Pearson, 2018. ISBN 978-1-292-26885-9.Rational expectations and the efficient markets hypothesis applied to the stock market.