Is the Efficient Market Hypothesis Sound Footing for Capital MarketTheory?
Critics of the current paradigm for financial analysis point to flaws in the very hypothesis upon which capital market theory and valuation theory rest, the efficient market hypothesis. Since the 1960s, quantitative capital market theory such as statistical analysis, modern portfolio theory and corporate valuation is predicated on the efficient market hypothesis (EMH). The EMH states that prices reflect “all that is knowable” (Fama 1965). There are strong, semi-strong and weak versions of this theory based on the interpretation of “all that is knowable”. A strong version of EMH includes all public and private information, semi-strong EMH includes all public information (Peters, 19) and weak includes all past trading information including prices volume data (Cornell, 38). Efficient markets are priced at a discount based on the assumption that todays changes in price is caused only by todays unexpected news (trippi, ). Past information does not affect market activity once the information
