The intellectual dominance of the efficient-market revolution has more been challenged by economists who stress psychological and behaviorial elements of stock-price determination and by econometricians who argue that stock returns are, to a considerable extent, predictable.
The intuition behind the efficient markets hypothesis is pretty straightforward- if the market price of a stock or bond was lower than what available information would suggest it should be, investors could (and would) profit (generally via ) by buying the asset. This increase in demand, however, would push up the price of the asset until it was no longer "underpriced." Conversely, if the market price of a stock or bond was higher than what available information would suggest it should be, investors could (and would) profit by selling the asset (either selling the asset outright or short selling an asset that they don't own). In this case, the increase in the supply of the asset would push down the price of the asset until it was no longer "overpriced." In either case, the profit motive of investors in these markets would lead to "correct" pricing of assets and no consistent opportunities for excess profit left on the table.
Efficient Market Hypothesis (EMH)Market Capitalisation
(c) In an efficient market, a strategy of minimizing trading, i.e., creating a portfolio and not trading unless cash was needed, would be superior to a strategy that required frequent trading.
What is Efficient Market Hypothesis (EMH)
Later work by Brealey and Dryden, and also by Cunningham found that there were no significant dependences in price changes suggesting that the UK stock market was weak-form efficient.
The efficient market hypothesis is also known by its acronym EMH
Firth found that the share prices were fully and instantaneously adjusted to their correct levels, thus concluding that the UK stock market was semi strong-form efficient.
Efficient-market hypothesis - Trader Wiki
The finance industry is in the midst of a transformative period of evolution, and financial economists have a huge agenda to tackle. They should do so quickly, given the determination of politicians to overhaul the regulation of financial markets.
Definition of market efficiency - NYU
One economist leading the effort to define that new paradigm is Andrew Lo, of the Massachusetts Institute of Technology, who sees merit in both the rational and behavioural views. He has tried to reconcile them in the “adaptive markets hypothesis”, which supposes that humans are neither fully rational nor psychologically unhinged. Instead, they work by making best guesses and by trial and error. If one investment strategy fails, they try another. If it works, they stick with it. Mr Lo borrows heavily from evolutionary science. He does not see markets as efficient in Mr Fama's sense, but thinks they are fiercely competitive. Because the “ecology” changes over time, people make mistakes when adapting. Old strategies become obsolete and new ones are called for.