Research: Testing the Efficient Market Hypothesis

The Efficient Market Hypothesis (EMH) contends that the expected returns from investing are commensurate with the risk assumed – no more, and no less. Discussions of this theory have postulated three forms of efficient market: weak, semi-strong and strong.

Weak EMH
Studies discussing the weak form of EMH have argued that the past history of price information is of no value in assessing future changes in price.

The EMH does not state in any of its three forms that abnormal returns (either high or low) cannot be achieved occasionally on a random basis. However, EMH does contend that consistently abnormal returns in excess of those commensurate with the risk involved are not possible in a truly efficient market.

Semi-strong EMH
The semi-strong form of EMH states that information which is available publicly, such as price, earnings, dividends, stock split announcements, new product developments, financing difficulties, and accounting changes, cannot be used to earn returns consistently in excess of those warranted by the level of risk assumed in the investment decision. This is the most widely-held belief among investment analysts and academics.