Efficient market hypothesis

28 10 2012

Efficient market hypothesis roughly says that the “market” is an efficient information processor, in the sense that it processes all news that may affect the performance, hence the value, of a company, and instantaneously reflects it as its share price (as the resultant of sell-buy actions of the actors).

If this hypothesis is true, then trying to find an “edge” in the market through news gathering and forecasting/modelling, is an effort in vain. Because one tries to find the actual value of a company, through its book value, news, intrinsic value (the present value of a company’s future dividends), and compares it with the market value, and decide to buy or sell the company’s share (i.e. hope that the market will eventually reveal the true value of the company).