Question

Financial markets operate with varying degrees of efficiency. What are the main ways in which the efficiency of financial markets and instruments are defined? Which markets are most efficient? Least efficient? Based on what measures? Why?

Answer 1

The efficiency of financial markets is defined by 3 forms of efficiency :

Strong-form : No investor can outperform the market by fundamental or technical analysis or better information.

Semi-strong : Neither technical nor fundamental analysis can result in outperforming the market. However, information anomalies may exist whereby access to material non-public information can result in beating the market

Weak form : Fundamental analysis as well as information anomalies can result in excess returns for some investors

Developed and mature financial markets with very low information barriers, easy access to information, free flow of capital, transparent disclosures and availability of information technology result in relatively more efficient markets. This is because information can be disseminated and processed by investors immediately, and prices can quickly adjust by inflow or outflow of capital. Examples are the U.S. financial markets

Developing markets with high information barriers, opaque disclosures, and barriers to flow of capital result in less efficient markets. This is because information takes time to disseminate, some investors may have preferential access to information, and prices cannot quickly adjust as there are barriers to flow of capital. Example is China financial markets