Efficient Market Hypothesis

“You can’t beat the market”.

Textbooks present three forms of this statement. To quote McCauley (who gives credit for these to “finance theorists”): “Weak form: it’s impossible to develop trading rules to beat market averages based on empirical price statistics. Semi-strong form: it’s impossible to obtain abnormal returns based on the use of any publicly available information. Strong form: it’s impossible to beat the market consistently by using any information, including insider information.”

The strong form makes a person with a natural science education background wonder whether this is a “law of nature” or a “law” enforced by “law enforcement”. The weak form seems to be formulated in a falsifiable way. It is this form that can be falsified in spectacular ways by using world’s most liquid market — the forex market.