Question

If the stock price is overvalued, does that indicate a weak form of market efficiency, semi-strong form market efficiency, or strong form market efficiency? How are stock prices and market efficiency related?

Answer 1

If the stock market is overvalued,that will be indicating a weak form of market efficiency because weak form of market efficiency will not be discounting any kind of private and public Information and current price will only be representative of historical Trends and it cannot be used for prediction of future prices.

Strong form of market efficiency advocates that all the publicly available information and the privately available information have already been discounted into the stock price and there is no scope of making additional rate of return and semi efficient form of market will also advocate that publicly available information are discounted into the stock price whereas insider information are not discounted into the stock price so if the stock market is overvalued, it will mean that it is not reflecting the true status of the publicly available information into the stock price and it will mean that it is not representing any kind of a strong or semi strong form of market efficiency.

stock prices and market efficiency are related because stock prices will be following the level of the market efficiency and if the the market is highly efficient stock prices will already be discounting all the publicly and privately available information so they will not be providing any scope of making additional rate of return and there will be only advocation of passive investment