Empirical Implication of the Efficient Market Model

Two alternative versions of the efficient market model are compared, a Bayesian version and an orthodox version. The Bayesian version is usually used to define an efficient market models, where markets make optimum use of all available information. However, the orthodox version is usually used to construct empirical tests of the models. In this paper, it is shown that most empirical tests are only applicable for the orthodox version. Past rejections of efficient market models may merely reflect the Bayesian assertion that information effects probabilities; market may still be making optimal use of all available information.