In finance, the efficient-market hypothesis (EMH) asserts that financial markets are "informationally efficient". That is, one cannot consistently achieve returns in excess of average market returns on a risk-adjusted basis, given the information publicly available at the time the investment is made.Burton Malkiel, the author of A Random Walk Down Wall Street, and one of the most fierce defender of the theory, writes in one of his academic publications:
The efficient market hypothesis is associated with the idea of a “random walk,” which is a term loosely used in the finance literature to characterize a price series where all subsequent price changes represent random departures from previous prices. The logic of the random walk idea is that if the flow of information is unimpeded and information is immediately reflected in stock prices, then tomorrow’s price change will reflect only tomorrow’s news and will be independent of the price changes today. But news is by definition unpredictable and, thus, resulting price changes must be unpredictable and random. As a result, prices fully reflect all known information, and even uninformed investors buying a diversified portfolio at the tableau of prices given by the market will obtain a rate of return as generous as that achieved by the experts.Before we go further, let me quote Yogi Bera for you: In theory there is no difference between theory and practice. In practice there is.
So in case you still believed in the Efficient Market Theory, here's how to debunk it: JPMorgan Posts Perfect Trading Record for Three Quarters of 2010
Feb. 15 (Bloomberg) -- JPMorgan Chase racked up a perfect trading record for the second half of last year, making money every day after accomplishing the same feat in the first three months of the year.
Traders at the New York-based bank made an average of $76 million a day last year, down from $84 million in 2009, according to an investor presentation today at the bank’s New York headquarters. JPMorgan’s average daily trading revenue was $21 million in 2008, $39 million in 2007, $47 million in 2006 and $37 million in 2005, according to JPMorgan’s presentation. [...]For this to happen within the Random Walk theory, it would mean that the probability of such an event to occur would be (considering 21 trading days per month, 3 months per quarter, and 3 quarter in a row):
P = 1 / 2^(21*3 *3) or else P = 1 / 2^189 that is very close to 1 / 10^57
Please do correct me if I'm wrong with my math.
Of course, another explanation could be that JPMorgan is simply just lying about these daily profits...