Efficient Market Hypothesis (EMH) is one of the grossly researched areas of financial
economics. The concept of an efficient capital market was evolved in the 1960s by
Eugene Fama. In his doctoral dissertation, Eugene Fama (1965) argued that in an
active market, where well informed and rational investors are trading, securities will be
correctly priced and reflect all available information. In an efficient market, an investor
can never outperform the market consistently over a period of time, irrespective of
whatever trading strategy is adopted by him/her.
Fama (1970) has categorized market efficiency into three different forms: weak,
semi-strong and strong form, based on the information set that is fully reflected in the
security prices. In the weak form of efficiency, security prices fully reflect the information
content of past prices and volumes, whereas in the semi-strong form of market efficiency,
the trading strategy, based on fundamental analysis, fails to yield systematic positive
return. Under the strong form of EMH, the security prices fully reflect all available
information, public as well as private.Numerous studies and tests have been conducted on all forms of EMH (Turan and
Bodla, 2004). However, some of the recent studies indicated departure from market
efficiency. Fama and French (1988) and Lo and Mackinlay (1988) gave evidence against
the weak market efficiency. Some cross-sectional differences among stock returns were
found to occur with regularity. These regularities in the stock returns have been termed
as anomalies. An investigation to these anomalies can be used to frame investment
strategy capable to outperform a naive buy and hold strategy.
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