### 날짜 : 2024-04-15 15:20 ### 주제 : Efficient market hypothesis (EMH) #economics ---- The Efficient Market Hypothesis (EMH) is a theory in financial economics that asserts that asset prices fully reflect all available information at any given time. The hypothesis suggests that stocks always trade at their fair value, making it impossible for investors to purchase undervalued stocks or sell stocks for inflated prices. Consequently, according to EMH, it is not possible to consistently outperform the overall market through expert stock selection or market timing, and the only way an investor can possibly obtain higher returns is by purchasing riskier investments. The EMH was developed by Eugene Fama in the 1960s and comes in three forms or levels of efficiency: 1. **Weak-Form Efficiency**: This form asserts that the current price of securities fully reflects all past market prices and data. This implies that past price movements are of no use in predicting future price movements, rendering technical analysis ineffective. 2. **Semi-Strong Form Efficiency**: This asserts that all public information is completely reflected in stock prices, not just past prices. Therefore, neither fundamental nor technical analysis can give an investor an edge. Any new information about a company, when it becomes available, is rapidly and unbiasedly incorporated into the stock's price, and as such, when a profit opportunity arises, it disappears almost instantaneously. 3. **Strong-Form Efficiency**: The strongest version of market efficiency claims that stock prices reflect all information, public and private (insider knowledge). According to strong-form efficiency, even corporate insiders with privileged access to material nonpublic information cannot earn an abnormal return. However, numerous studies have shown that insiders are able to earn higher returns, suggesting that markets are not strong-form efficient. #### Criticism and Support of EMH **Critiques:** - Critics argue that EMH overlooks anomalies within financial markets, such as stock market bubbles and crashes, which cannot be explained by efficient markets. - Behavioral economics theorists point out that investors are not always rational, and cognitive biases can lead to systematic errors in judgment that prove markets are not always efficient. - Empirical evidence shows that active fund managers can outperform market averages over short periods, indicating possible inefficiencies. **Support:** - Proponents argue that EMH is supported by the difficulty most professional investors have in consistently beating the market when accounting for risk and transaction costs. - The growth of index funds, based on the concept that consistently outperforming the market is difficult and unlikely, is often cited in support of the EMH. #### Relevance of EMH Despite its controversial nature, EMH has important implications: - **Portfolio Management**: It led to the creation of index funds, which simply track market indices rather than rely on active management. - **Risk Management**: It informs investment strategies and risk management, challenging financial professionals to focus on diversification, risk assessment, and the cost-effectiveness of their investment activities. - **Corporate Finance**: In the sphere of corporate finance, EMH implies that financial markets provide the best estimate of a company's value, informing decisions on stock issuance and repurchase, as well as mergers and acquisitions. The EMH, for all its theoretical appeal, has been a point of contention, but its underlying assertion—that markets are tough to beat consistently, especially after accounting for transaction costs and taxes—continues to influence investment philosophy and strategies significantly.