Efficient Market Hypothesis

The Efficient Market Hypothesis, formalized by Eugene Fama in his 1970 review article, holds that financial asset prices fully reflect available information, with the implication that systematic above-market returns net of risk are not achievable through information-based trading. Fama distinguished three forms — weak (past prices already reflected), semi-strong (all public information reflected), and strong (all information including private reflected) — with progressively stronger empirical claims. The hypothesis is empirically challenging because it must be tested jointly with an asset-pricing model (the joint hypothesis problem), and the steady accumulation of cross-sectional anomalies (size, value, momentum) led to factor-model extensions and behavioral-finance critiques most prominently from Robert Shiller, who shared the 2013 Nobel with Fama in a notable acknowledgment of the unresolved tension. The strong form is widely rejected; weaker forms remain operationally influential, particularly as the basis for index investing.