The Efficient Market Hypothesis

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The Efficient Market Hypothesis suggests that market prices fully reflect all information available to the public. However, practitioners and regulator are uncertain as to the validity of this hypothesis. The questions that Bloomfield raises are: If market prices truly reflect information, why do investors waste efforts by trying to identify mispriced stock prices? Why do managers try to hide bad news in footnotes? And why do regulators try to prevent them from doing this? Robert J. Bloomfield presents an alternative to EMH called the Incomplete Revelation Hypotheses. IRH suggests that statistical data which is more costly drives fewer trading interest. Therefore information that is more costly to extract from publicly available information is not fully reflected in the market prices.
Information is hidden due to noise traders trading randomly. This noise creates a balance where a sufficient amount of investors purchase costly information in order to make gains equal information collection costs. IRH also implies that the more informed investors there are, the more complete market prices will be and the smaller the gain will be for each investor trading on that knowledge. If there are very few informed investors, the gain will outweigh the cost of extracting that information. Likewise, if there are too many informed investors, the gain will not be sufficient enough to cover the cost of that information. Therefore equilibrium requires less traders collect costly information.
Bloomfield stresses the use of statistics extracted from data rather than the use of data itself. Few investors’ trade based on costly statistics, which means markets do not reflect these costly statistics completely. These statistics are also data which many t...

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...act costly information because the costs surpass the gains, so trading on less information doesn’t always imply irrationality. Nevertheless traders can also make noise based on their irrational and unpredictable changes in feelings.
The reliance on unreliable data, aggressive trading by investors with little information and the collection of inappropriate information helps to understand overreactions.
Conclusion
Many people believe the efficient market hypothesis is inefficient and Bloomfield presents an alternative to this hypothesis. Bloomfield posits the meaning of costly statistics is not fully revealed in the market. Some investors put more importance on some statistics rather than others which indicates that some statistics are less exposed in market prices. IRH essentially extends EMH by identifying extraction costs of statistics from publicly available data.

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