The financial markets context
The financial markets context

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The financial markets context

4 Conclusion

This unit looked at the question of whether the financial markets are efficient in the sense that prices demanded are fair and reflect all known and relevant information about investments. The Efficient Markets Hypothesis defines such efficiency at three levels, depending on how much information is in fact incorporated into prices. The weak form states merely that the current price already reflects all information incorporated into previous prices, so that each successive price move is a reaction to fresh news and therefore cannot be predicted from old prices. The semi-strong form states that all public information is already in the price; and the strong form states that all information, public or private, is already discounted.

Having carried all before it in the 1970s and for much of the 1980s, the EMH has had to contend with subsequent challenges of both a theoretical and empirical nature. But it remains the most robust model of how the stock markets operate in the most advanced economies of the world.


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