Financial market efficiency

Financial market efficiency

Financial market efficiency is an important topic in the world of Finance. While most financiers believe the markets are neither 100% efficient, nor 100% inefficient, many disagree where on the efficiency line the world's markets fall.

The main theories describing how efficient the financial markets are can generally be broken into those that believe the markets are generally very efficient, and those that believe the markets are generally inefficient. Both sides have data to prove their thesis as well as numerous examples that appear to prove their point. In general, most financiers believe that the efficiency of a market directly correlates to the number of its participants.

Efficient market theories

1.Allocative efficiency - A market is allocatively efficient if it channels funds to those firms and organizations with the most promising real investment opportunities.

2.Operational efficiency - carries its operations as low a cost as possible.

3.Information Processing efficiency (Pricing efficiency)- any new relevant information is quickly and accurately impounded in prices.

Description/definition of 100% efficient market

Inefficient market theories

Description/definition of 100% inefficient market

Mechanisms to take advantages of Inefficiencies

Arbitrage

riskless profit

References


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