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What Hedge Funds Really Do by Tucker Balch, Philip J. Romero

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CHAPTER 8

The Efficient Market Hypothesis (EMH)—Its Three Versions

Another extremely influential element of finance theory is the idea that most asset markets are highly efficient. In this context, efficiency means that information that can affect prices travels quickly throughout a market and that their prices are affected accordingly. Recall that arbitrage opportunities exist when a buyer and a seller have differing views of the true price of a stock—perhaps because of differences in information available. The more efficient a market, the more that relevant information is equally available to all market participants. Many disclosure requirements in law and regulation aim to improve the efficiency of the market. Likewise, prohibitions on insider ...

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