![]() Information arbitrageurs are economic agents which buy undervalued assets and sell overvalued assets based on new information as it comes out. Market efficiency is a by-product of market participation by information arbitrageurs. ![]() Strong form efficient markets take into account all relevant (even insider) information in current security prices. Semi-strong form efficient markets take into account all relevant publicly available information in current security prices. Weak form efficient markets take into account all historical price data in current security prices. The Efficient Market Hypothesis distinguishes between weak, semi-strong, and strong form efficient markets according to the subset of information which the market takes into account in current security prices. What the Efficient Market Hypothesis says is that there is no free lunch. If you want higher returns, you need to take on higher risk. Theoretically that's "easy", you can just buy a leveraged index ETF and hold on to your pants. The Efficient Market Hypothesis does not say you can't beat the market in terms of cumulative return. The Father of Modern Empirical Finance, Eugene Fama I recommend taking a look at my previous articles - which can be found here, here, here, and here - but if you don't have the time, the subsections below are designed to provide just the right amount of background information and context to understand the point of the package. I've written about market efficiency and randomness for a while now (since April of 2015) and over that time my understanding of the topic has grown exponentially. In the parts that follow I will continue going through various statistical tests of randomness and explain if and how they relate to the ones we have already covered. This article is part one of at least three parts.
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