Question

What is the definition of market efficiency for a fixed horizon? Is it possible to have deviations from efficiency in a market that is efficient? Explain

Answer 1

Market Efficiency for a fixed horizon: For an efficient market all the relevant information about stocks are already reflected into the prices of the stock. Thus, one can never beat the market by applying strategies.

It is one where market price is unbiased estimate of the true value of the investment. What we have learned from an efficient market it never always represent the true value of the stocks, there may be some variations or deviations in the prices in long run. But these deviations are random.

It means that prices can be greater than or less than the true value but these are on a random basis for a fixed long term.

According to the concept of market efficiency, there is unlikely that all markets can be efficient for all the investors, it can also be possible that some markets are efficient and others are not only for some investors groups not for the all.

Now, coming to the deviations, Yes there can be deviations when market is efficient, but can't be for long run, rather it will be random. There may be large deviations but random.

Apart from this, there are three different forms of efficiency, (i). Weak-form of efficient market,

(ii). Semi-strong form of efficient markets and (iii). strong form of efficient market.

These three forms have also some impact on the deviations in efficient market.