What is price efficiency? Definition & types
Price efficiency refers to the idea that the price of a security or asset is reflective of all of the data and information that are publicly available to investors, analysts, and the rest of the public at any given time. The concept of price efficiency is part of the efficiency market hypothesis, ...
What is price efficiency?
Price efficiency refers to the idea that the price of a security or asset is reflective of all of the data and information that are publicly available to investors, analysts, and the rest of the public at any given time.
The concept of price efficiency is part of the efficiency market hypothesis, in which prices adjust quickly to the release of new information.
What are the 3 types of price efficiency?
There are three types of price efficiency, each differing on the type of data and information that may or may not be publicly available.
Weak-form efficiency
Weak-form efficiency is the concept that all past information is reflected in current prices and indicates that historical data cannot be used to predict future price movements. An investor cannot gain an advantage over another unless the investor has access to exceptional information, such as news and information that aren’t publicly disclosed.
Semi-strong-form efficiency
Semi-strong form efficiency is the idea that all publicly available information—including historical data, financial statements, news, public announcements and notices—are reflected in current market prices. An investor cannot outperform the market with publicly available information, unless there’s access to private, non-public information provided by persons working in the company, sometimes referred to as insider information.
Strong-form efficiency
Strong-form efficiency theory posits that all forms of information, public and private, are reflected in current market prices, and as a result, no investor can gain a competitive advantage to outperform the market. Investors cannot gain an edge with insider information on the assumption that that information is also known to the public.
Criticisms of price efficiency
With information about stocks and assets available online and in many cases in real time, one could make the case that financial markets have indeed become efficient. Still, price efficiency remains hypothetical, and there are factors that contribute to inefficiencies, such as irrational investment behavior. Even if all bits of data and information are priced into the market, investors may become exuberant and contribute to an inflationary environment in financial markets.
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