grad-emh

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SKILL.md

Efficient Market Hypothesis (EMH)

Overview

The Efficient Market Hypothesis (Fama, 1970) posits that asset prices fully reflect available information, making it impossible to consistently earn abnormal returns. EMH is organized into three forms — weak, semi-strong, and strong — each defined by the information set reflected in prices.

When to Use

  • Evaluating whether a trading strategy exploits genuine inefficiency
  • Designing event studies (semi-strong form test)
  • Assessing if active management adds value over passive indexing
  • Debating the validity of technical or fundamental analysis

When NOT to Use

  • As justification to ignore all market anomalies without investigation
  • When markets are clearly illiquid or informationally segmented
  • For normative claims — EMH describes price behavior, not what prices "should" be
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