In this chapter, we examined market price behavior and market efficiency. The efficient markets hypothesis (EMH) asserts that, as a practical matter, organized financial markets like the New York Stock Exchange are efficient. Researchers who study efficient markets often ask whether it is possible to "beat the market." We say that you beat the market if you can consistently earn returns in excess of those earned by other investments having the same risk. If a market is efficient, earning these excess returns is not possible, except by luck. The controversy surrounding the EMH centers on this assertion.

      The EMH states that the market is efficient with respect to some particular information if that information is not useful in earning a positive excess return. The forms of market efficiency and their information sets are:

1. Weak Form: past price and volume information.
2. Semistrong Form: all publicly available information.
3. Strong Form: all information of any kind, public or private.

      You learned how information affects market prices by influencing traders to act on the arrival of information. You then learned how to distinguish among informed trading, illegal insider trading, and legal insider trading.

      Testing market efficiency is difficult. We discussed four reasons for this: (1) the riskadjustment problem, (2) the relevant information problem, (3) the dumb luck problem, and (4) the data-snooping problem.

      We then presented evidence concerning tests of market efficiency. One lesson you should learn is that professional money managers have been unable to beat the market consistently. This is true despite their tremendous resources, experience, opportunities, and incentives. Also, this is true despite patterns and other oddities that have occurred historically in the stock market. The fact that professional money managers have been unable to beat the market supports the notion that markets are generally rather efficient.

      We close the chapter by discussing some aspects of stock price behavior that are both baffling and hard to reconcile with market efficiency. We discussed the day-of-the-week effect, the amazing January effect, the turn-of-the-year effect, the turn-of-the-month effect, the earnings announcement puzzle, and the price/earnings (P/E) puzzle. Finally, we talked about some famous bubbles and crashes, including the Crash of October 1929, the Crash of October 1987, the Asian crisis, and the dot-com bubble and crash.