Financial market efficiency

Market efficiency measures how quickly prices reflect available information

Market efficiency is categorized into three forms: weak, semi-strong, and strong. Weak-form efficiency posits that all past trading information is reflected in asset prices. Semi-strong-form efficiency suggests that asset prices reflect all publicly available information. Strong-form efficiency claims that asset prices reflect all information, both public and private.

Example

In weak-form efficiency, technical analysis would not consistently outperform the market. In semi-strong-form efficiency, fundamental analysis would not consistently outperform the market. In strong-form efficiency, even insider information would not consistently outperform the market.

Understanding these forms helps investors and analysts assess the potential for profit-making strategies and the effectiveness of different types of market analysis.

Related concepts

Efficient-market hypothesis

Prices reflect all available information

Supply and demand

Market-clearing price where quantity supplied equals quantity demanded

Information ratio

Information ratio = Active return / Tracking error

Color depth

Market depth measures buy/sell volume at each price level

Greeks (finance)

Greeks measure sensitivity of option prices to underlying parameters

Elasticity (economics)

Price elasticity of demand = -2

Educational content, not financial advice.

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