The Efficient Market Theory: Foundations and Variations

The Efficient Market Hypothesis (EMH) was formalized by Eugene Fama in his 1970 article, “Efficient Capital Markets: A Review of Theory and Empirical Work” (Journal of Finance, vol. 25, no. 2, 1970). Fama posits that the prices of financial assets fully reflect all available information at any given moment. The major implication: it is impossible to “beat the stock market” systematically and sustainably, because prices instantly incorporate new information.

Fama distinguishes three forms of efficiency:

  • Weak form: prices reflect all historical information from past prices. Thus, technical analysis is ineffective.
  • Semi-strong form: prices incorporate all publicly available information (financial reports, economic announcements, etc.). Fundamental analysis then becomes useless.
  • Strong form: prices even incorporate private and confidential information. In this case, no investor, even an insider, can gain an advantage.

This classification has structured academic and practical debates for over 50 years. While the weak form is largely validated, the strong form is considered unrealistic, notably due to the Grossman-Stiglitz paradox (1980).

SPIVA 2023: Active Management Facing Performance Reality

The most recent empirical data confirm the extreme difficulty of beating the benchmark index. The SPIVA report (S&P Dow Jones Indices, 2023) is an essential reference, compiling the performance of active funds versus their market indices over extended horizons.

Over 20 years, 92.2% of active US stock funds underperformed the S&P 500 (total return). In Europe, over 10 years, 82% of active stock funds underperformed their benchmark index.