Prices reflect all available information
Efficient-market hypothesis
Prices reflect all available information
The efficient-market hypothesis (EMH) posits that asset prices incorporate all known information, making it impossible to consistently outperform the market through stock selection or market timing.
The EMH suggests that since prices already reflect all available information, any new information would be quickly absorbed into asset prices, negating the potential for systematic gains.
Research since the 1990s has focused on market anomalies, deviations from specific risk models, to test the validity of the EMH.
Example
A company releases its earnings report. If the EMH holds true, the stock price will quickly adjust to reflect this new information, making it difficult for investors to gain an advantage.
Understanding the EMH helps investors recognize the limitations of market timing and stock selection, guiding them towards risk-adjusted investment strategies.
Related concepts
Financial market efficiency
Market efficiency measures how quickly prices reflect available information
Supply and demand
Market-clearing price where quantity supplied equals quantity demanded
Bias ratio
Bias ratio detects valuation bias in asset pricing
Overconfidence effect
Overconfidence leads to overtrading and underperformance
Anchoring effect
Anchoring bias skews sell decisions based on initial purchase price
Quantity theory of money
MV = PY equation
Educational content, not financial advice.
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