Hypothesis

Hypothesis of efficient markets in finance, the assumption of market efficiency states that the price of assets traded in financial markets reflect all information known to the members of the market and all investors’ beliefs about the future. This hypothesis implies that it is possible to consistently achieve results exceed market except through luck or inside information. It also suggests that the future flow of news that will determine the stock price is random and can not be known in advance. The hypothesis of market efficiency is a central piece of the theory of efficient markets. It is a common mistake to believe that the efficiency hypothesis implies that investors behave rationally. The hypothesis allows some investors overreacts to news and other underreaction. The only thing required is that the reactions of investors are sufficiently random so it is not possible to obtain a benefit that exceeds the market.It is possible therefore that the market behaves irrationally for a long period of time. Crash, bubbles and depressions are always compatible with the hypothesis that such behavior is not predictable. The hypothesis is presented in three ways (weak form, semi-strong form and strong form). Each form has different implications for the functioning of the markets.