EMH refers to the impossibility of outperforming the market by using the information available in the market except through luck. New information provided should be quick and efficiently incorporated to asset prices.
The three levels of efficiency include:
- Weak form- Market share price reflects information about past price movements (eg stock market). The share price will follow a random walk, which means prices rise or fall depending on good/bad news.
- Semi-strong form- The market share price includes all past information and publicly available information. The share price reacts within 5 – 10 minutes of new information being released. For example, in the case of breaking bad news share prices will fall.
- Strong form- Market share price includes all information public and private including information not published. Directors who are insiders will have access to unpublished information. Inside dealers will be fined and imprisoned for making profits trading in shares before news affecting them becomes public.