Efficient Market Hypothesis (EMH)

The Efficient Market Hypothesis (EMH) is an important theory in finance that holds that market prices always fully reflect all available information, so the market is efficient. The theory was first systematically proposed by Eugene Fama in 1970 and is widely used in financial market analysis.

According to the Efficient Market Hypothesis, markets can be divided into three different levels of efficiency: weak efficiency, semi-strong efficiency, and strong efficiency. Weak efficiency holds that market prices have reflected all historical price information; semi-strong efficiency holds that market prices reflect not only historical information but also all publicly available information; strong efficiency holds that market prices reflect all historical information, public information, and non-public internal information.

Taking weak efficiency as an example, if the market is weakly efficient, investors cannot obtain excess returns by analyzing past price and volume information. Technical analysis does not work in such a market. A common test method for the weak efficiency hypothesis is to test whether there is autocorrelation in the price series. If not, it indicates that the price is a random walk.

The semi-strong efficiency hypothesis holds that all publicly available information, such as corporate financial reports, economic news, and analyst forecasts, is quickly reflected in market prices. Therefore, in this case, fundamental analysis cannot help investors obtain excess returns. The market reacts very quickly to public information, and arbitrage opportunities are quickly eliminated.

The strong efficiency hypothesis is the most stringent form, arguing that even internal information will be immediately reflected by the market. Therefore, no one can obtain excess returns through non-public information. This view is highly controversial because there are many cases of insider trading in reality, but it does not mean that the market is completely inefficient.

The efficient market hypothesis has a profound impact on investment strategies. If the market is really efficient, then the value of actively managed funds will be greatly reduced because they cannot consistently outperform the market index. In contrast, passive investment strategies, such as index funds, may be more reasonable because they are low-cost and outperform most actively managed funds in the long run.

However, there are many anomalies in the real market, such as the "value effect" and the "momentum effect", that is, low price-to-earnings stocks and stocks with good past performance often bring excess returns. These phenomena seem to contradict the efficient market hypothesis, and the academic community has conducted extensive research on this, but no consensus has been reached.

The rise of blockchain technology provides a new perspective for the efficient market hypothesis. Blockchain technology greatly improves the transparency and speed of information acquisition through its decentralized, transparent and tamper-proof characteristics. This feature may bring the market closer to the state described by the efficient market hypothesis. For example, in cryptocurrency markets such as Bitcoin and Ethereum, transaction data is public and transaction speed is very fast. Investors can obtain market information in real time, which supports the semi-strong efficiency hypothesis to a certain extent.

Although the application prospects of blockchain technology are broad, its market is still in its early stages and has high volatility. The applicability of the efficient market hypothesis still needs to be further verified. The prices of many cryptocurrencies are still affected by market sentiment and speculative behavior rather than pure information reflection.

The efficient market hypothesis reminds investors to maintain a rational understanding of market efficiency and not blindly pursue short-term returns. Whether it is the traditional financial market or the emerging blockchain market, understanding and applying the efficient market hypothesis will help to formulate a more scientific and robust investment strategy.