future price movements cannot be predicted by using past prices, i.e past data on stock prices is of no use in predicting future stock price changes. 2. Semi-strong efficiency Asset prices fully reflect all of the publicly available information. Therefore, only investors with additional inside information could have an advantage in the market. Any price anomalies are quickly found out and the stock market adjusts. 3. Strong-form efficiency Asset prices fully reflect all of the public and inside information available. Therefore, no one can have an advantage in the market in predicting prices since there is no data that would provide any additional value to the investors. Efficient-market hypothesis (EMH) Fama also created the efficient-market hypothesis (EMH), which states that in any given time, the prices on the market already reflect all known information, and also change fast to reflect new information. Therefore, no one could outperform the market by using the same information that is already available to all investors, except through luck. Random walk theory Another theory related to the efficient market hypothesis created by Louis Bachelier is the "random walk" theory, which states that prices in the financial markets evolve randomly. Therefore, identifying trends or patterns of price changes in a market can't be used to predict the future value of financial instruments. Evidence Evidence of financial market efficiency Predicting future asset prices is not always accurate (represents weak efficiency form) Asset prices always reflect all new available information quickly (represents semi-strong efficiency form) Investors can't outperform on the market often (represents strong efficiency form) Evidence of financial market inefficiency There is a vast literature in academic finance dealing with the momentum effect that was identified by Jegadeesh and Titman. Stocks that have performed relatively well (poorly) over the past 3 to 12 months continue to do well (poorly) over the next 3 to 12 months. The momentum strategy is long recent winners and shorts recent losers, and produces positive risk-adjusted average returns. Being simply based on past stock returns that are functions of past prices (dividends can be ignored), the momentum effect produces strong evidence against weak-form market efficiency, and has been observed in the stock returns of most countries, in industry returns, and in national equity market indices. Moreover, Fama has accepted that momentum is the premier anomaly. January effect (repeating and predictable price movements and patterns occur on the market) Stock market crashes, Asset