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Beyond Mechanical Markets by Michael D. Goldberg, Roman Frydman

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5

Castles in the Air:The Efficient Market Hypothesis

THE THEORY OF the rational market arose as an attempt to provide a scientific underpinning to the Efficient Market Hypothesis, which serves as the cornerstone of financial economics. According to the hypothesis, asset “prices always ‘fully reflect' available information” (Fama, 1970, p. 383).

As it stands, the Efficient Market Hypothesis says very little about how prices unfold over time, or whether markets allocate capital well. There is an abundance of publicly available information about economic, political, and social factors and events that is quickly disseminated to individuals around the world. Participants select from this flow of information when forming their forecasts of future ...

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