Ivanov I. O., Ph.D. student at the Department of Financial Management and the Stock Market, Odesa National Economic University, Odesa, Ukraine

ORCID ID: 0000-0003-3998-8098
e-mail: laeda.29@gmail.com

The Efficient Market Hypothesis: Scientific Consensus on the Viability of the Theory

Abstract. Introduction. Despite significant progress in researching the efficiency of financial markets, the efficient market hypothesis remains a subject of active debate in the academic community. The core assumption of the hypothesis is that markets are predominantly efficient, meaning that the prices of financial assets reflect all available information and represent their fair value. However, despite existing evidence and confirmation, there are questions regarding the accuracy of this assumption and its practical applicability. Specifically, it has been found that investors do not always exhibit complete rationality in their decision-making and behavior. This implies that certain inefficiencies may be present in markets, manifested in the form of market anomalies. Market anomalies are situations where the prices of financial assets do not align with expected rational market behavior. They can include unexplained price gaps, anomalies in price trends, or deviations from rational asset values. The existence of such anomalies contradicts the core assumption of the efficient market hypothesis and motivates further exploration of these anomalies in terms of their exploitable potential for obtaining excess profit (which contradicts the efficient market hypothesis). To assess the feasibility of applying the postulates of the efficient market hypothesis to investment portfolio management strategies, it is necessary to explore the current state of development of the efficient market hypothesis and determine the consensus regarding its viability in the modern stage of financial science. This will contribute to the formation of a more comprehensive and generalized understanding of the efficiency of financial markets.

Purpose. The purpose of this article is to determine the current consensus regarding the viability of the efficient market hypothesis and the overall efficiency of financial markets, as well as the potential for obtaining excess profits through the exploitation of market inefficiencies, through the analysis and synthesis of the latest research findings in the field of financial market efficiency.

Results. The development stages and assumptions of the efficient market hypothesis were examined. Research on the three forms of market efficiency (weak, semi-strong, and strong) confirms their validity in specific markets. Recent studies on market anomalies, conflicting with the efficient market hypothesis, were analyzed. It is found that these anomalies are explained by the adaptive market hypothesis, which represents the next stage of market efficiency. Market anomalies can occur intermittently due to investor behavior. Although market anomalies exist, research indicates that they exhibit instability over time. Attempting to exploit these anomalies to generate excess returns poses significant challenges. Consequently, relying solely on market anomalies as a strategy for obtaining excess profits becomes impractical. It is important to acknowledge the limitations and uncertainties surrounding the stability and exploitability of these anomalies.

Conclusions. Research on the efficient market hypothesis yields important findings. Despite challenges to some assumptions, the core assumption of market efficiency is confirmed. Excess returns are difficult to consistently achieve compared to the market average due to investor behavior and unpredictable market reactions. Exploiting market anomalies for excess profits requires significant resources and entails high risks. Market efficiency will continue to increase, necessitating considerations in investment portfolio management strategies. Future developments should explore the effectiveness of existing approaches, such as active and passive strategies, and securities selection methods like technical and fundamental analysis. Also, further exploration and analysis are necessary to understand the evolving nature of market efficiency and develop effective approaches and methods for investment portfolio management in the context of an ever-changing financial landscape.

Keywords: efficient market hypothesis; adaptive market hypothesis;  market anomalies; market efficiency.

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