Abstract:

The efficient market hypothesis (EMH) has become one of the most influential theories and a „milestone” of modern financial economics. Although we owe to Paul Samuelson the first theoretically rigorous formulation of the EMH (Samuelson 1965), this is Eugene Fame who developed and popularized the concept (Fama 1965, 1970, 1991). Apart from defining the efficient market[1], Fama also suggested distinguishing between three forms of market efficiency: weak, semi-strong, and strong. The weak form implies that the current prices of financial assets incorporate, at any moment, all the existing historical financial information. As a result, investors cannot obtain abnormal profits from investing in these financial assets. This form also implies that the prices will exhibit random walk. Then, the semi-strong form, comprising the weak form, assumes that financial assets prices reflect, at any moment, all the information existent on a market, including historical prices and other historical  information, and, additionally, the prices change rapidly and without biases to incorporate any other  new public information released on the market. In the case of semi-strong form of market efficiency, neither technical nor fundamental analyses can determine the way investor should split his funds so that the obtained profitability is higher than that achieved in case of investment in a random portfolio of financial assets. Finally, the strong form of efficiency assumes that prices incorporate all the available information on a market, which includes: historical financial information (weak form), all new public information (semi-strong form), and all private information regarding a financial asset (Titan 2015).

[1] According to Fama (1970), the efficient market is a market with great number of rational profit-maximizers actively competing with each, trying to predict future market values of individual securities, and where current important information is almost freely available to all participants.