Economics Financial Markets Questions
Market efficiency refers to the degree to which prices of financial assets accurately reflect all available information. In an efficient market, prices adjust rapidly and accurately to new information, making it difficult for investors to consistently earn abnormal returns. There are three forms of market efficiency: weak form, semi-strong form, and strong form.
- Weak form efficiency suggests that current prices fully reflect all past market data, such as historical prices and trading volumes. Therefore, it is not possible to predict future price movements based on past information alone.
- Semi-strong form efficiency implies that current prices reflect all publicly available information, including financial statements, news releases, and economic data. In this form, it is not possible to consistently earn abnormal returns by trading on publicly available information.
- Strong form efficiency suggests that current prices reflect all public and private information, including insider information. If the market is strong form efficient, it is impossible to consistently earn abnormal returns even with insider information.
Efficient markets are considered desirable as they ensure fair pricing and allocation of resources. However, the degree of market efficiency can vary across different markets and time periods.