Reversion Diversion Hypothesis

Abstract

Information is an assumption for modern finance. The Efficient Market Hypothesis uses information to back its case of efficiency. The EMH case is weak, but as Martin Swell (2011) explains, until a flawed hypothesis is replaced by better hypothesis, criticism is of limited value. This paper challenges the information assumption in EMH based on the idea laid out first by Kenneth E. Boulding (1966), highlights the body of work discussing information relevance, information irrelevance, information content since Ball and Brown (1968) and illustrates how ‘Mean Reversion Framework’ (2015) can be used to re-explain the transformation of information from relevance to irrelevance, also referred to as the ‘Reversion Diversion Hypothesis’.


Keywords: Efficient Market Hypothesis, Information, Random Walk Hypothesis, Market Inefficiency

JEL Classification: A00, A10