The Efficient Markets Hypothesis(EMH) hypothesizes that stocks are always in equilibrium and that it is impossible for an investor to consistently “ beat the market.” On a norm, this theory advocates that stocks in general are neither overvalued nor undervalued namely they are fairly priced and in equilibrium.
There are several degrees of EMH namely:
(a) The weak-form of the EMH states that all information contained in past price movements is fully reflected in current market prices
(b) The semistrong-form of the EMH states that current market prices reflects all publicly available information. Implications of this form of EMH implies that there is no abnormal returns can be gained by analyzing stocks and whenever information is released to the public, stock prices will respond only if the information is different from what had been expected.
(c) The strong-form of the EMH states that current market prices reflect all pertinent information, whether publicly available or privately held (inside information). If this form holds, even insiders would find it impossible to earn abnormal returns in the stock markets.
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