History of the efficient market hypothesis.
In its third and least rigorous form (known as the form), the EMH confines itself to just one subset of public information, namely historical information about the share price itself. The argument runs as follows. ‘New’ information must by definition be unrelated to previous information, otherwise it would not be new. It follows from this that every movement in the share price in response to new information cannot be predicted from the last movement or price, and the development of the price assumes the characteristics of the random walk. In other words, the future price cannot be predicted from a study of historic prices.
What Is Market Efficiency? - Investopedia
Observers of the random walk in share prices naturally sought to explain their findings in terms of the efficiency with which new information was incorporated into prices. They reasoned that if there were delays as new relevant information became disseminated through the market, the price of the affected share would not move instantaneously to the new equilibrium level reflecting the information, but would trend towards the new level over time. This might happen gradually or quite rapidly, but would still not be instantaneous. If this were the case then there would be periods (immediately following the release of new information) when price trends could be discerned. This in turn would mean that excess returns could be made, either by buying shares before the price had finished moving up to the new equilibrium level justified by good news, or by selling before the price had finished moving down to the new equilibrium level justified by bad news. The fact that these early studies found no such trends or correlations was seen as powerful support for the argument that the markets were efficient. It seemed to be the case that at any point in time, all available information was reflected in the price: the next move could not be predicted from the last one, as the next piece of news would not be genuine news if it was already implied in past prices. This finding was the central feature of what became known as the Efficient Markets Hypothesis (EMH) – the theory that the major stock markets, in particular those of the USA and UK, while not perfect, are at least efficient.
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