The efficient market hypothesis (EMH) assumes that there are
three basic forms of market efficiency. They are:
- Weak form EMH: The weak-form EMH implies that
the market is efficient, reflecting all market information. This
hypothesis assumes that the rates of return on the market should be
independent; past rates of return have no effect on future rates.
Given this assumption, rules such as the ones traders use to buy or
sell a stock, are invalid.
- Semi-Strong EMH: The semi-strong form EMH
implies that the market is efficient, reflecting all publicly
available information. This hypothesis assumes that stocks adjust
quickly to absorb new information. The semi-strong form EMH also
incorporates the weak-form hypothesis. Given the assumption that
stock prices reflect all new available information and investors
purchase stocks after this information is released, an investor
cannot benefit over and above the market by trading on new
information.
- Strong-Form EMH: The strong-form EMH implies
that the market is efficient: it reflects all information both
public and private, building and incorporating the weak-form EMH
and the semi-strong form EMH. Given the assumption that stock
prices reflect all information (public as well as private) no
investor would be able to profit above the average investor even if
he was given new information.