Discuss the premises of efficient market hypothesis (EMH) and based on EMH provide some justification or evidence if stocks prices are predictable or not

The Efficient Markets Hypothesis (EMH) is an investment theory primarily derived from concepts attributed to Eugene Fama’s research as detailed in his 1970 book, “Efficient Capital Markets: A Review of Theory and Empirical Work.” Fama put forth the basic idea that it is virtually impossible to consistently “beat the market” – to make investment returns that outperform the overall market average as reflected by major stock indexes such as the S&P 500 Index.

Premises of the Efficient Markets Hypothesis

There are three variations of the hypothesis – the weak, semi-strong, and strong forms – which represent three different assumed levels of market efficiency.

1. Weak Form

The weak form of the EMH assumes that the prices of securities reflect all available public market information but may not reflect new information that is not yet publicly available. It additionally assumes that past information regarding price, volume, and returns is independent of future prices.

The weak form EMH implies that technical trading strategies cannot provide consistent excess returns because past price performance can’t predict future price action that will be based on new information. The weak form, while it discounts technical analysis, leaves open the possibility that superior fundamental analysis may provide a means of outperforming the overall market average return on investment.

STOCK PREDICTIBILITY - YES

2. Semi-strong Form

The semi-strong form of the theory dismisses the usefulness of both technical and fundamental analysis. The semi-strong form of the EMH incorporates the weak form assumptions and expands on this by assuming that prices adjust quickly to any new public information that becomes available, therefore rendering fundamental analysis incapable of having any predictive power about future price movements. For example, when the monthly Non-farm Payroll Report in the U.S. is released each month, you can see prices rapidly adjusting as the market takes in the new information.

STOCK PREDICTIBILITY - YES

3. Strong Form

The strong form of the EMH holds that prices always reflect the entirety of both public and private information. This includes all publicly available information, both historical and new, or current, as well as insider information. Even information not publicly available to investors, such as private information known only to a company’s CEO, is assumed to be always already factored into the company’s current stock price.

So, according to the strong form of the EMH, not even insider knowledge can give investors a predictive edge that will enable them to consistently generate returns that outperform the overall market average.

STOCK PREDICTIBILITY - NO

SOURCE-

WIKIPEDIA

BALANCE

OXFORD (SCHOLAR)