We use cookies to improve security, personalize the user experience,
enhance our marketing activities (including cooperating with our marketing partners) and for other
business use.
Click "here" to read our Cookie Policy.
By clicking "Accept" you agree to the use of cookies. Read less
Understanding the Efficient-Market Hypothesis (EMH) in Legal Context
Definition & Meaning
The Efficient-Market Hypothesis (EMH) is a financial theory that suggests it is impossible to consistently earn returns that exceed average market returns on a risk-adjusted basis, using only publicly available information. The core idea is that financial markets are efficient in processing information, meaning that asset prices reflect all known data at any given time.
This hypothesis was first introduced by French mathematician Louis Bachelier in his 1900 dissertation titled "The Theory of Speculation." EMH is categorized into three forms:
Weak EMH: Prices reflect all past publicly available information.
Semi-strong EMH: Prices reflect all publicly available information and adjust instantly to new public information.
Strong EMH: Prices reflect all information, including insider information.
Table of content
Legal Use & context
The Efficient-Market Hypothesis is primarily relevant in the fields of finance and investment law. It is often discussed in the context of securities regulation, investment strategies, and financial advisory practices. Legal professionals may encounter EMH when dealing with cases related to insider trading, market manipulation, or investment fraud.
Users can manage certain legal aspects related to EMH through self-help tools, such as legal templates for investment agreements or disclosures available on platforms like US Legal Forms.
Key legal elements
Real-world examples
Here are a couple of examples of abatement:
Example 1: An investor believes they can outperform the market by analyzing historical stock prices. However, according to weak EMH, this strategy is unlikely to succeed because past prices are already reflected in current market prices.
Example 2: A company announces a new product launch. Under semi-strong EMH, the stock price should adjust immediately to reflect this new public information, making it difficult for investors to profit from the announcement after it is made.
Comparison with related terms
Term
Description
Comparison
Efficient-Market Hypothesis
Theory stating that asset prices reflect all available information.
Focuses on market efficiency.
Random Walk Theory
Suggests stock price changes are random and unpredictable.
Emphasizes unpredictability rather than efficiency.
Behavioral Finance
Studies the effects of psychological factors on investor behavior.
Challenges the assumptions of rationality in EMH.
Common misunderstandings
What to do if this term applies to you
If you are considering investing based on the Efficient-Market Hypothesis, it is essential to understand that while markets are generally efficient, there are always risks involved. You may want to:
Conduct thorough research on market conditions and available information.
Consider using legal forms and templates to formalize your investment agreements.
Consult a financial advisor or legal professional if you have specific concerns or complex situations.
Find the legal form that fits your case
Browse our library of 85,000+ state-specific legal templates.