Efficient Market Hypothesis (EMH)
A helpful baseline: beating the market is hard, so define your edge precisely.
EMH is a strong starting point: prices incorporate available information quickly. That does not mean markets are perfect, but it means your edge must be real (information, analysis, speed, structure, or behavior) and strong enough to beat costs and competition.
The Three Forms (Cleanly)
Forms of efficiency
- Weak form: Past prices alone do not predict future prices reliably.
- Semi-strong: Public information is quickly reflected in prices.
- Strong: Even private information is reflected (an extreme theoretical case).
Where Markets Become Less Efficient
Common pockets
- Illiquid assets and small caps (higher frictions)
- Crisis periods (forced selling and constraints)
- Behavioral extremes (panic, euphoria, crowding)
- Complexity and model disagreement (hard-to-price situations)
Practice: Choose a Realistic Default
Key Takeaways
EMH is a baseline: alpha is hard after costs and competition.
Edges appear in frictions, constraints, and behavior — but they are not free.
If you cannot name your edge, default to low-cost diversification and strong execution discipline.
Efficient Market Hypothesis (EMH)
A helpful baseline: beating the market is hard, so define your edge precisely.
EMH is a strong starting point: prices incorporate available information quickly. That does not mean markets are perfect, but it means your edge must be real (information, analysis, speed, structure, or behavior) and strong enough to beat costs and competition.
Table of Contents
The Three Forms (Cleanly)
Forms of efficiency
- Weak form: Past prices alone do not predict future prices reliably.
- Semi-strong: Public information is quickly reflected in prices.
- Strong: Even private information is reflected (an extreme theoretical case).
Where Markets Become Less Efficient
Common pockets
- Illiquid assets and small caps (higher frictions)
- Crisis periods (forced selling and constraints)
- Behavioral extremes (panic, euphoria, crowding)
- Complexity and model disagreement (hard-to-price situations)
Practice: Choose a Realistic Default
Key Takeaways
EMH is a baseline: alpha is hard after costs and competition.
Edges appear in frictions, constraints, and behavior — but they are not free.
If you cannot name your edge, default to low-cost diversification and strong execution discipline.
Related Terms
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