A Modern Approach to the Efficient-Market Hypothesis

TL;DR

This paper clarifies the conditions for market efficiency, emphasizing that both absence of weak arbitrage and market sensitivity are necessary and sufficient for a market to be informationally efficient.

Contribution

It introduces a refined theoretical framework distinguishing market sensitivity from weak arbitrage, advancing understanding of informational efficiency.

Findings

No weak arbitrage plus market sensitivity equals informational efficiency

Market sensitivity is necessary for a market to fully reflect information

The paper provides a theoretical basis for assessing market efficiency

Abstract

Market efficiency at least requires the absence of weak arbitrage opportunities, but this is not sufficient to establish a situation where the market is sensitive, i.e., where it "fully reflects" or "rapidly adjusts to" some information flow including the evolution of asset prices. By contrast, No Weak Arbitrage together with market sensitivity is sufficient and necessary for a market to be informationally efficient.