2019, Vol. 2, Issue 1

A decade after Samuelson's (1965) landmark paper, many others extended his framework to allow for risk-averse investors, yielding a neoclassical" version of the EMH where price changes, properly weighted by aggregate marginal utilities, must be unforecastable (Le Roy, 1973; Rubinstein, 1976; and Lucas, 1978). In markets where, according to Lucas (1978), all investors have rational expectations", prices do fully reflect all the available information and marginal-utility-weighted prices follow martingales. The EMH has been extended in many other directions, including the incorporation of non-traded assets such as human capital, state-dependent preferences, heterogeneous investors, asymmetric information, and transaction costs. But the general thrust is the same: individual investors form expectations rationally, markets aggregate information efficiently, and equilibrium prices incorporate all the available information.