Research Discussion Paper – RDP 2000-01 The Efficient Market Hypothesis: A Survey
January 2000
Abstract
The efficient market hypothesis states that asset prices in financial markets should reflect all available information; as a consequence, prices should always be consistent with 'fundamentals'. In this paper, we discuss the main ideas behind the efficient market hypothesis, and provide a guide as to which of its predictions seem to be borne out by empirical evidence, and which do not. In examining the empirical evidence, we concentrate on the stock and foreign exchange markets.
The efficient market hypothesis is almost certainly the right place to start when thinking about asset price formation. The evidence suggests, however, that it cannot explain some important and worrying features of asset market behaviour. Most importantly for the wider goal of efficient resource allocation, financial market prices appear at times to be subject to substantial misalignments, which can persist for extended periods of time.