What is an efficient market

Efficiency market hypothesis

The Efficiency market hypothesis, also Market efficiency hypothesis called, is a theory of what information is contained in stock prices.

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Efficiency market hypothesis definition

Eugene Fama made the claim in 1970 that Financial markets efficient are. In this way, no economic entity can gain an advantage over other market participants through financial analysis or insider trading. To perform better than the market in the long term, so one permanent above-average profit Achieving through stock trading is therefore also not possible. This thesis is known to us today as the efficiency market hypothesis and for the Finance from so great importancethat Fama was awarded the Nobel Prize for his research.

A market is efficient when all information this world already in today Price of the securities are included. This doesn't just have to be financial information, either political or social incidents flow into the share price.

Assumptions of the market efficiency hypothesis

But when exactly is a financial market efficient? The efficiency market hypothesis assumes that the Overall assessment the market participant rational is. If everyone has the same information, this is the forecast of future price developments for all market participants equal and it can no systematic excess returns can be achieved through an information advantage. So no one can due to technical analysis, Fundamental analysis or insider trading make a lasting profit. Random excess returns can of course still be achieved.

Make sure that the Market efficiency hypothesis or Efficiency market hypothesis only on Capital markets Applies. Because only here is through that digitalization given that information on companies, countries and raw materials is reflected in the share price as soon as it becomes known. Traditional markets, such as supermarkets, can Not Offer. On the one hand, sellers have a significant one Information advantage towards buyers, on the other hand is mostly due to a Intention to consume and no profit-making acted.

Levels of market efficiency

The efficiency market hypothesis can be repeated in three stages be divided into: in Weakness, Medium strong and Strong efficiency.

Poor efficiency

In the poor efficiency it is assumed that all historical market-relevant developments already in the current Course included are. With the help of technical analysis no systematic excess returns can therefore be achieved, since the resulting information is already included in the price and thus no information advantage represent.

Medium efficiency

The medium efficiency states that in addition all public available market-relevant information in the current course of a security contain are. Thus, with the help of the Fundamental analysis no longer achieve excess returns. After all, you would only gain insights through the analysis that are already included in the price.

Strong efficiency

The strong efficiency states that in addition to all not public market-relevant information are included in the current price of a security. So it is no longer possible over Insider trading to make a profit. After all, every single piece of information available has already been priced in.

Nowadays research suggests that the Capital market most likely as medium strength can be viewed. Sounds logical, doesn't it? There is probably some information about every course that not all people are equally aware of.